POINT OF VIEW/ Atsushi Yamada: Small borrowers have struggled long enough

Financial services minister Shizuka Kamei's controversial proposal to allow small businesses to temporarily suspend debt payments aims to help weaker debtors, who have been until now left out in the cold by national financial policymakers.

In these tough financial times, it is crucial for the government to shift its focus from supporting the large lender banks to helping the small borrowers in need. But as it stands, Kamei's bill appears watered down.

According to Bank of Japan data, outstanding loans to small and medium-sized companies from 145 banks across the nation totaled 177 trillion yen at the end of July, down from 229 trillion yen in October 2000, when the central bank started compiling such statistics.

The figure dropped by 52 trillion yen over those nine years.

But if banks were not lending out all that money, where were they parking it?

Government bonds. Investment in government bonds by the banks totaled 48 trillion yen in January 2000. That figure rose to 113 trillion yen at the end of July this year--a jump of 65 trillion yen.

In the late 1990s, when the government injected huge amounts of public money into undercapitalized banks during the banking crisis, the state's intent was not to bail out individual banks but to protect the financial system.

The need to keep credit--the lifeblood of industry--flowing through financial veins, including the smallest capillaries, was used to justify the huge tax-funded bank bailout.

Despite the government's aim to alleviate the credit crunch, the banks tightened up lending standards, cutting off needed lines of new credit to smaller businesses. Instead, they poured the money into safe government bonds.

What was the result? It isn't pretty.

Today, every month, 1,300 businesses go under. Since the beginning of this year, of companies filing for bankruptcy that owe 10 billion yen or more, 36 percent failed because they were unable to access the capital they needed to finance their operations, despite the fact that they were earning profits, according to Nobuo Tomoda of Tokyo Shoko Research Ltd., a credit research company.

If left to decide things for themselves in this tough fiscal climate, banks naturally rein in their lending to protect themselves.

Policy intervention is in order.

It won't hurt big banks to allow small borrowers to postpone repayment of their loan principal for up to three years. It is more important to ensure such borrowers can stay afloat and keep on making interest payments.

Banks probably do not wish to bow to the dictates of the authorities, as they will have to do under the planned debt moratorium law's limits on their management freedom. The law will require banks to make all-out efforts to meet any requests from borrowers wanting to reschedule debt repayments.

But these banks had best recall that they have accepted taxpayer bailout capital. They all agreed to take the "abnormal" policy step of allowing the government to become a major shareholder. If they are willing to accept government intervention when they are in crisis, they must not refuse government attempts to save troubled debtors.

A U.S. government program has been set up to prevent housing loan borrowers from being evicted from their homes after defaulting on their mortgages due to the subprime loan crisis. Under the system, U.S. government corporations buy up sour housing loans at discounted prices, repackage them as low-interest loans at discounted purchase prices and offer them back to the financially troubled homeowners. The system reduces the homeowner's loan principal and the interest payments owed.

In Britain, a new relief program launched in April enables households that fell behind on mortgage payments to defer interest payments for up to two years. In France, individuals struggling to repay debt can turn to arbitrators that arrange debt rescheduling and interest reductions.

But in Japan, in contrast, individual debtors have never received policy support even when the government and banks were partly at fault for their financial woes. This was clearly shown during the downturn triggered by the collapse of the asset-inflated bubble economy in the early 1990s.

Japan's debtors have always been on their own. They had to either pay their debts or face the consequences. Asking for debt relief was--and still is--regarded as something to be ashamed of.

With its overemphasis on protecting big banks, the postwar financial system has brainwashed consumers into accepting this idea.

That is in part why, when debt-servicing organizations such as the Resolution and Collection Corp. buy up bad loans at discount prices, the original borrowers of the loans receive no benefit. These bodies keep the purchase prices of delinquent loans a secret and try to take as much of the original capital and interest from the borrowers as they can get their hands on.

And even when consumers suffer losses in loan schemes set up by banks, the big lenders still are not held accountable.

It is the borrowers who must pay if they miss a payment--they are charged an overdue interest rate of 14 percent, starting the very next day.

Japan's individual and small corporate borrowers have suffered under debt-related rules and practices that one-sidedly favor banks. The newly elected government has the perfect opportunity to adjust the balance of power between lenders and borrowers.

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The author is a senior staff writer at The Asahi Shimbun's "be" section.(IHT/Asahi: November 14,2009)