Sme Financing in Japan: Characteristics and Problems, Predominance of Low-Interest Rate Loans

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SME Financing in Japan: Characteristics and problems, predominance of low-interest rate loans “经济kyoshitsu”专栏在2010年9月14日,日本经济新闻的问题 UESUGI Ichiro Senior Fellow ,RIETI
WANABE Wako Associate Professor, Keio University
Following the global financial crisis, although overall business conditions for Japanese small and medium-sized enterprises (SMEs) became extremely difficult, relationships between SMEs and their creditor banks have been relatively stable. Yet, it has long been said that Japanese banks are not making sufficient efforts to improve the efficiency of financing to SMEs. In this article, we focus on this longstanding problem with SME financing in Japan. We also discuss what factors make it difficult for Japanese banks to cultivate new customers (borrowers) with medium risk, a market segment targeted by the now-defunct Incubator Bank of Japan. ♦  ♦  ♦

The current recession has been extremely tough and Japanese companies have been in a tight cash-flow position due to declining sales. Even so, banks have not hardened their lending attitude as much as one might have expected. The degree of credit tightening has been fairly limited, particularly in comparison with situations in the United States and Europe, where banks rapidly tightened credit standards for loans as shown by several indicators. A questionnaire survey conducted in February 2009 by the Research Institute of Economy, Trade and Industry (RIETI), in which we asked companies about changes in the lending attitude of their creditor banks, found that only slightly more than 10% of respondents experienced a drastic deterioration in the lending attitude of at least one of their creditor banks following the crisis, mostly in cases where they had short-term transactions with megabanks. Indeed, the outstanding balance of SME loans turned upward at the end of 2008 or in the first half of 2009 at credit unions (i.e., shinkin banks and cooperatives) and regional banks (i.e., first- and second-tier regional banks). Thus, apart from a limited number of exceptional cases, it is unlikely that the credit squeeze was caused by factors attributable to banks, such as the accumulation of bad loans and losses on securities holdings. In the latest financial crisis, Japanese banks suffered relatively small losses compared to their U.S. and European counterparts. This, with the help of government liquidity support measures, enabled Japanese banks to function, to some extent, as a steady supplier of funds to companies. However, whether or not they have done this efficiently is another story. From 2000 onward, banks and the government have taken various initiatives to facilitate greater efficiency in the supply of funds to SMEs while accelerating the process of bad loan disposals. Perhaps the most important element of these initiatives is the promotion of relationship banking. When making decisions on lending to SMEs that do not provide reliable financial information, hard-to-quantify information (soft information) such as the quality of management and viability of their business is very important. Banks can obtain such soft information only through their close, long-term relationships with SMEs. Lending practices that take advantage of such relationships are referred to as relationship banking. ♦  ♦  ♦

Do banks actually collect soft information on SMEs and effectively use it in their decision-making for lending and other undertakings? Before answering this question, let us be clear about one characteristic of Japanese banks: they maintain longer relationships with their corporate borrowers and are better placed to collect soft information than their counterparts in other countries. The question is whether or not Japanese banks actually lend on the basis of soft information and, if they do, whether such lending practices represent widespread behavior of banks in general. At present, the answer to this question appears to be no. Japanese banks set most of their loans at low interest...
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