Commentary / Japan | SENTAKU MAGAZINE

Why SMEs should fear megabank restructure

Japan’s three major banking groups have unveiled plans for large-scale restructuring programs to streamline their operations. With the expanded use of artificial intelligence and other technology, they are seeking to eliminate work equivalent to a combined total of 33,000 jobs. Although the banks say the redundant manpower will be shifted to other operation, it is feared that a large number of employees could face the ax, especially those who started their career during the bubble boom of the late 1980s to the early 1990s.

An employee of Mizuho Bank in his 40s says the news has turned the atmosphere at the bank chilly. He goes on to say that the impact of automation of the banking operation and the job cuts will not be limited to employees of the banks but extend to their business clients.

Big banks have long been known for turning the cold shoulders to small- and medium-size companies (SMEs) in times of need, as reflected in the frequent complaint that “the bank offers to lend an umbrella when the sun is shining but takes it away when it starts raining.” Changes to the loan screening process at major banks will have serious consequences on the fund-raising efforts of their client firms. Smaller banks will likely follow their examples, which could result in many small businesses facing withdrawal or early repayment of loans.

The Mizuho employee is in charge of lending to small- and medium-size companies at one of the bank’s branch in Tokyo. He has taken pride in his job, which involves frequent contacts and exchanges with owners of businesses in the area. However, the wave of automation has in recent years been creeping up to his work. With an input of numerical scores on the performance and assets of the businesses, the computer program will automatically give a preliminary judgment on whether to extend loans to the companies.

Still, there is still room for bank workers like him to do their job — by taking into account extra information such as business conditions specific to individual clients and judgment on relevant markets that cannot be numerically scored, they offer new terms to the clients, including requesting additional collateral, to conclude the loan contract.

Such a work flow is not unique to Mizuho but is common to the other major groups Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking as well as many regional banks. A reporter with a newspaper with nationwide circulation says that the mega-banks are seeking to almost fully automate such loan screening process on the strength of AI programs.

Assessment of a company’s business performance and market conditions can vary from one bank employee to another, and may even be affected by their personal relations with the clients. The bank employees may take risks on some loan projects on their own judgment. In the eyes of artificial intelligence, such judgment based on the bank employees’ experience may just represent the risk of the loans going bad and irrecoverable. In January, Goldman Sachs in the United States reduced the number of its stock traders from more than 500 to just two — and replaced the work of the rest with AI programs. The trend in the financial sector is to reduce the human factors as much as possible.

What has added to the move toward reducing manpower are the low interest rates in recent years. According to a staff member of Bank of Tokyo-Mitsubishi UFJ, lending rates on loans to risky smaller businesses are usually set higher than those for larger clients. Under the Bank of Japan’s negative interest rate policy, however, banks are beginning to offer a lending rate as low as in the 2 percent range to the small firms in their competition with each other to lend. A ¥10 million loan on such terms will only bring ¥200,000 in annual interest income. Assigning a career-track bank employee — who may earn more than ¥10 million a year — to such work will be an extremely inefficient use of manpower.

According to Tokyo Shoko Research, total outstanding loans by domestic banks to SMEs reached ¥294 trillion at the end of September 2016. Of the total, the three magabanks plus the Resona Bank group accounted for roughly one-third, or about ¥100 trillion. The other roughly ¥200 trillion was shared by more than 100 regional banks and government-affiliated institutions. This shows that major banks play big roles in lending to the smaller businesses.

The aforementioned Mizuho Bank employee is afraid that given that AI programs will nearly eliminate risk-taking, more than half of his loan clients may be abandoned by the bank. A not-so-small amount of the major banks’ ¥100 trillion outstanding loans to the SMEs may be withdrawn due to the computerized judgment by AI programs.

A crucial question that follows is whether the smaller companies will be able to find other sources of funding when the megabanks stop lending to them. An expert at a bank-affiliated think tank says that if those firms start borrowing from regional banks and smaller financial institutions known as shinkin banks, lending rates are bound to go up, hurting the finances of those companies.

Under a law passed in 2009, when the Democratic Party of Japan was in power, it became much easier for SMEs to win a moratorium or rescheduling of their loan repayments — which effectively turned the screening of such firms into a nominal process. As employees of major banks have come to rely on data accumulated by institutions like Teikoku Databank, their capacity to make independent research and judgment on business information have declined, says an insider at the Sumitomo-Mitsui Banking. Over the past several years, the magabanks have increased lending to SMEs — but they mostly targeted promising businesses that had previously taken loans from regional banks or local lending institutions, the insider says.

If the banks starting withdrawing the loans from such clients, the banks — which are supposed to play the role of ensuring blood flow of the economy — may end up choking the smaller businesses to death.

The journalist with the nationwide-circulation newspaper, meanwhile, is concerned that the banks may instead try to expand their card loans to owners and executives of the SMEs. Already, the banks have sharply expanded their card loans to individual borrowers, raising concern that such loans offered without much screening are creating multiple debtors who borrow beyond their repayment means.

Bank employees in charge of lending to small firms have been proposing to their owners and executives to make loan cards for corporate clients. The Sumitomo Mitsui Banking insider says card loans for such corporate clients, with the cap on borrowing set at more than ¥10 million, might be used to keep the borrowers’ businesses running. That raises the prospect of banks playing the roles of not just consumer loan lenders but the “shoko loan” commercial moneylenders that in the past created a social problem by offering collateral-free but high-interest loans to businesses.

The massive restructuring being planned at the major banks may result not just in job cuts for the highly-paid bank employees but a much broader, serious consequences for the economy.

This is an abridged translation of an article from the December issue of Sentaku, a monthly magazine covering political, social and economic scenes. English articles of the magazine can be read at www.sentaku-en.com

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