EDITORIAL: Rules on moneylenders

The crippling debt burden of multiple debtors--consumers who have borrowed heavily from more than one lender--has become a serious social problem that is often behind suicides, family breakdowns and other tragedies.

Solving this problem requires the development of an effective financial safety net to prevent heavy borrowers from falling into bankruptcy. The pillar of the safety net should be the fully revised law regulating nonbank moneylenders. The government needs to take a range of policy measures to make sure that the law, which will come fully into force in June, will be as effective as it should be.

When it is fully enforced, the law will lower the legal upper limit on annual interest rates on consumer loans to 20 percent from 29.2 percent and ban loans in excess of one-third of the borrower's annual income.

These rules will help prevent multiple borrowing. Since the wholesale revision of the law was enacted at the end of 2006, the rules and penalties against hardball debt collection tactics and operations of unregistered lenders have been gradually strengthened.

The number of multiple debtors has been declining steadily during the period, proving the effectiveness of these measures.

On the other hand, a growing number of consumer credit suppliers have been falling into the red or going out of business.

Some in the industry warn that tighter credit screening due to the scheduled full enforcement of the law could leave more consumers without access to loans and thereby lead to the proliferation of illegal lenders.

The new rules should not be allowed to cause heavy debtors to be forced into paying back a large chunk of their debt immediately nor make credit hard to come by even for creditworthy borrowers.

Sufficient policy efforts must be made to prevent such situations from occurring. The government should also step up its efforts to crack down on loan sharks. Also important is fixing the flaws in the nation's financial system that have caused the growth of the population of multiple debtors in the first place.

While borrowers in good standing who can put up sufficient collateral receive low-interest bank loans, weak borrowers without assets to secure debt have no choice but to depend on consumer credit firms and other nonbank lenders who charge hefty interest rates.

This polarized credit situation must be rectified.

Three years ago, the government set up a special task force on the problem of multiple borrowing to promote borrower-friendly "safety net loans." But progress has been disturbingly glacial.

One important initiative was aimed at expanding so-called consumer credit cooperatives, a form of consumer cooperatives focused on low-interest lending to workers that has been pioneered in Iwate Prefecture.

But no similar cooperative has been set up in the past three years because of tough regulatory restrictions on new entries into the business. Among general consumer cooperatives, the association of Green Co-ops operating in western Japan provides a wide variety of services in Fukuoka and four other prefectures, including counseling, lending and money education for heavy debtors trying to regain their financial footing.

But such services are not spreading among other consumer cooperatives.

What is vital for progress is the involvement of banking institutions. The city of Kurihara in Miyagi Prefecture has teamed up with the Sendai Bar Association and two local lenders--Community Bank Senpoku and Ichinoseki Shinkin Bank--to set up a "Nozomi" (Hope) loan program that will supply up to 10 million yen ($106,000) of lending at an annual interest rate of 7.9 percent to help debt-ridden individuals put their lives back in order.

The interest rate is kept down with investment profits from the 100 million yen the city has deposited with the two financial institutions. The banking institutions provide advice on financial rehabilitation for borrowers. The two lenders decided to cooperate with the municipal government because they feared they would not survive unless the local community regained its economic vigor. The neighboring city of Tome, also in Miyagi Prefecture, has also begun a similar loan program. Local governments across the nation can and should adopt a similar approach to get banking institutions involved in their efforts to help harried borrowers.

--The Asahi Shimbun, April 26