Banks’ expanding card loan trade

The banking industry’s card loan business is expanding, with outstanding lending of this type extended by domestic banks reaching ¥5.67 trillion at the end of June — an increase of 1.7 times over the past five years. Free from the lending limits that bind consumer loan firms, both mega-bank groups and regional institutions have flocked to the profitable card loan business as interest margins on lending to businesses and housing loans shrank amid the ultra-low interest rate policy of the Bank of Japan. That has led to criticism that the banks, by providing easy and convenient access to uncollateralized loans to individuals at ATMs, have taken the place of consumer loan lenders in providing the means for people to borrow beyond their repayment capacity and fall into multiple debts.

On guard against the introduction of regulations such as lending caps, the banking industry responded to the criticism by announcing voluntary measures in March urging banks to tighten their screening to avert excessive lending. But the amount of such loans continues to increase, and the Financial Services Agency plans to inspect the banks to see whether they are indeed making the promised efforts, such as better grasping the repayment ability of borrowers to prevent them from borrowing beyond their means. As competition among banks seems poised to tighten in this segment, the government should carefully consider whether leaving it up to their voluntary efforts will be enough to stop the problem from getting worse.

Multiple indebtedness of borrowers from nonbank moneylenders such as consumer loan firms used to be a serious social problem. Heavily indebted people continued to borrow from one lender to repay their loans from another, while forceful and persistent loan collection tactics cornered many into taking their own lives. An amendment to the law on the money-lending business, which came fully into force in 2010, prohibited such loan collection practices and banned the moneylenders from loaning more than one-third of the borrower’s annual income. Lending by consumer loan firms have since declined.

Banks, which were not yet very active in offering uncollateralized loans to individual clients, were not covered by these regulations. In subsequent years, however, the banks rushed to expand their card loan business — in which they could charge loan interest of more than 10 percent even as the interest on lending to businesses and housing loans sagged under the BOJ’s monetary stimulus programs. The banks quickly expanded their card loan business effectively risk-free as consumer loan lenders, many of which came under the wing of major banking groups, served as guarantors for loans to individual borrowers in the event they fell in arrears. The card loan business has now evolved into a precious source of revenue and a growing segment for banks.

The expansion of the banks’ card loan business, however, has also been accompanied by criticism that the industry is refueling the problem of multiple indebtedness. The annual number of personal bankruptcies filed with courts — which has been on a decline from a peak of some 242,000 in 2003 as regulations on moneylenders were tightened — rose to 64,637 in 2016 for the first year-on-year increase in 13 years, and the upward trend continued in the first half of this year.

In its probe last year of 153 debt resolution cases involving bank card loans, the Japan Federation of Bar Associations said that borrowers in 95 of the cases had borrowed an amount exceeding one-third of their annual income, including from moneylenders. One of them borrowed ¥5 million even though he earned only ¥2 million a year — and later filed for personal bankruptcy — while another was able to borrow ¥3 million despite having no income at all. The bar federation says the banks should be covered by the lending limit imposed on the moneylenders, warning that the banks are apparently lending excessively to borrowers without adequately screening their income or indebtedness.

Following the call by the Japanese Bankers Association for voluntary measures to respond to such criticism, some major banks have reportedly tightened their in-house lending limits. Mizuho Bank, which allowed its customers to borrow (including from other banks and moneylenders) up to half of their annual income, lowered the limit to one-third of their income. Sumitomo Mitsui Banking Corp., which used to require borrowers to submit annual income certificates when the amount of the loans exceeds ¥3 million, now asks for such documents in extending loans of more than ¥500,000.

Inspections by the FSA may prompt banks to exercise more restraint in their card loan business. What is urgently needed are effective measures to stop people from borrowing beyond their repayment capacity, and the FSA should take a close look at whether the banks’ own efforts will accomplish that.