Another troubled Japanese consumer lender — Aiful — is struggling for its life, highlighting yet again the festering crisis in the once highly lucrative niche area of Japanese consumer finance.
The top four consumer lending companies reported total losses of $16bn in 2007 and despite hopes that 2008 might be a better year, business has been tough. Curiously, despite the relatively large sums involved, Japan’s consumer finance crisis by and large, seems to have escaped the world’s attention.
Things are not looking good for Aiful, Japan’s second-largest consumer lender with an estimated Y1,500bn ($16.5bn) in assets, which said on Thursday it would halve its workforce and slash branch numbers as it warned of a $3.4bn loss for the year to March 2010. S&P has warned that the lender could go bankrupt if it does not gain creditor support — quickly.
Shares of Aiful, which last week asked creditors to allow it to defer repayments on $3bn in debt, plunged another 30 per cent in Japan morning trade on Thursday before closing down 21 per cent at Y102.
As the FT reports, the plight of Aiful, a big lender to home owners as well as to small businesses, comes at a difficult time for the new Japanese government, which is seeking to support people in the lower income brackets and shore up consumer confidence.
The problems plaguing Japan’s moneylenders stem largely from earlier court rulings and a government crackdown from about 2007, prompted by soaring consumer debt levels, bankruptcies and unscrupulous lending practices.
The rules were swift and, say some, overly harsh. Now, numerous consumer lenders have been crippled by regulations that lowered maximum interest rates to 18 per cent from the previous 29 per cent and restricted the amount a single borrower could borrow to a third of their annual income.
That followed a Supreme Court ruling that judged consumer lenders had charged excess interest. Many lenders have since been hit demands from consumers forcing them to repay the past high interest charges now deemed illegal.
As a result, the sector has seen a huge wave of consolidation in the past year. While some of the top Japanese consumer lenders such as Promise and Acom have tied up with big Japanese banks, some of their western — mainly US — companies, such as General Electric, which sold its consumer finance business to Shinsei Bank last year, and Citigroup, now winding down its consumer lending operations, have exited the market.
Others have simply collapsed. Credia, a smaller lender, failed in 2007, and its Tokyo-based rival Ael Corp, sought protection from creditors with Y23bn in liabilities in March 2008.
Some of Aiful’s creditors, including key creditor Sumito Trust & Banking, have signalled they will try to co-operate to help Aiful after examining its turnround plan. But Moody’s, which cut Aiful’s senior unsecured debt rating to B3 from Ba2 the same day, warned that even if Aiful manages to alleviate the pressure on liquidity for now, it will face difficulty in maintaining its business franchise in a “persistently negative operating environment”.
The only silver lining to the very black consumer finance cloud, it would seem, is if you’re one of Japan’s top banks. The prognosis, according to one industry official, is that “at the end of the day, it looks [as if] Mitsubishi UFJ, Sumitomo Mitsui and Shinsei will control consumer finance in Japan,” he told the FT in May, referring to the three banks that have acquired substantial stakes in consumer finance companies. The only issue is making money out of it.
Related links:
Aiful to trim 2,000 jobs, forecasts $3.4bn loss - Bloomberg