Japan Risks Undermining Banks With Loans Moratorium, Gomi Says

By Finbarr Flynn and Shingo Kawamoto

Oct. 8 (Bloomberg) -- The Japanese government may undermine banks by forcing them to defer debt repayments while easing accounting standards on the loans, the country’s former top financial regulator said.

Shizuka Kamei, Japan’s newly appointed financial services minister, plans to submit legislation next month that would allow ailing small firms to postpone loan repayments for up to three years. Banks won’t have to classify credits encompassed by the moratorium as non-performing, he said this week.

“Banks will ultimately end up carrying the bill for a compulsory moratorium,” Hirofumi Gomi, 60, who pushed for stricter disclosure of delinquent loans as Financial Services Agency commissioner between 2004 and 2007, said yesterday in an interview. “Allowing banks not to call loans non-performing only puts off a problem, which will hurt banks’ finances later.”

Kamei, 72, says his plan will ease pressure on small companies after Japan’s deepest postwar recession drove bankruptcies to a six-year high. An index tracking Japanese banks has lost 5.5 percent since his Sept. 16 appointment partly on concern the proposed loan moratorium will sap profits.

“Banks are really afraid not only their balance sheets but also their reputations may get hurt,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “Saying banks won’t have to declare default on these loans is simply bad business and it’s not what banks are supposed to do.”

Hit Hardest

Sumitomo Mitsui Financial Group Inc., Japan’s second- largest listed lender, may be hit hardest among the nation’s biggest banks in terms of lost income from a moratorium as small companies account for a larger percentage of its loan portfolio, Ismael Pili, a Tokyo-based analyst at Macquarie Group Ltd., said yesterday in an interview.

Japan’s 123 lenders posted a combined loss of 2 trillion yen ($22.5 billion) in the fiscal year through March as investments soured and bad loans swelled, according to the Japanese Bankers Association. It was the first shortfall in five years.

Corporate bankruptcies rose to 8,169 cases in the six months ended June, an 8.2 percent increase from a year earlier, according to data from Tokyo Shoko Research Ltd. Kamei’s plans may put pressure on large banks’ credit ratings, said Naoko Nemoto, managing director at Standard & Poor’s in Tokyo Oct. 6.

Banks aren’t cutting off loans to borrowers and are dealing with requests to delay loan repayments on an individual basis, Tadashi Ogawa, head of Japan’s Regional Banks Association, said last month.

Moratorium Alternative

The government must adopt more measures to encourage banks to lend, said Gomi, who spent 10 years at the nation’s financial watchdog until he stepped down as commissioner in July 2007. Providing low-interest loans to small firms through state-owned financial institutions in cooperation with private banks and continuing guarantees for certain credits should be considered, he said.

Combined debts at failed companies rose 47 percent to 4.7 trillion yen in the first half, Tokyo Shoko data show. Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., and more than half the nation’s 87 publicly traded regional lenders posted losses in the latest fiscal year.

While at the agency, Gomi led a push to protect investor rights and was responsible for forcing banks to disclose bad loans from the late 1990s, when lenders were saddled with real estate debts dating back to the previous decade’s land-value bubble. Gomi is currently chairman of PricewaterhouseCoopers Research Institute (Japan) Co. in Tokyo.

Former Prime Minister Junichiro Koizumi’s measures to force banks to write off non-performing caused an unnecessary increase in bad debts, according to Kamei.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto@bloomberg.net.