Nikkei Weekly - November 1, 1999
Consumer finance adds color to gray sector Winning respect Demand for convenient loans propels 'sarakin' lenders from back alleys to main street
MINA HASEGAWA Staff writer
Japan's leading consumer-finance companies have reeled off year after year of double-digit growth with no help from the Finance Ministry, thank you, while others in the financial sector scrape to survive under the weight of bad loans and increased competition.
The public once saw consumer-finance companies as little more than loan sharks; now they often see them as the quickest, most efficient outlet for loans. In a land known for its thrift, consumer-finance companies have tapped into a demand among Japanese for loans - even at relatively high interest rates.
Alight at just about any major railroad station or walk through a large commercial building and you're apt to find an outlet where you can borrow anywhere from a few thousand to a few hundred thousand yen in a half hour or so. The outlets are often marked with colorful signs - a distinct contrast from the branches of their more staid rivals, the large commercial banks, which they often do business right next to.
Consumer-finance companies are known in Japan as sarakin, which is short for "salaried worker's financing" but has a more derogatory connotation closer to "loan shark" or "backstreet moneylender." These companies have expanded consumer services by investing in automated machines that provide credit; they've also set up management systems for sorting personal credit information and insurance systems to protect themselves from default.
These companies have market capitalizations equal to some commercial banks and securities firms, and they are now beginning to encroach on their respectable rivals' business. Credit-sales companies and commercial banks have begun to take notice.
Takefuji Corp., a leader in the consumer-finance business, said last week that it posted 52.8 billion yen ($503 million) in net profit for the fiscal first-half through September, up 27.8% from a year earlier. The company also revised its business estimates for the year ending next March: Pretax profit is expected to reach 200 billion yen, 8.5 billion yen more than estimates made this March, thanks to "a bigger than expected increase in new customers and growing demand," said Hikaru Kondo, managing director of Takefuji.
Other listed consumer-finance companies such as Acom Co., Promise Co. and Aiful Corp. will announce their business results this week. They are expected to show strong growth across the board.
According to earlier estimates from the five listed consumer-finance firms, including Sanyo Shinpan Finance Co., total pretax profit will be 532.4 billion yen in the current fiscal year ending in March, an increase of 7.1% from a year earlier. Lehman Brothers Japan Inc. estimates that the figure will swell to 637.3 billion yen by fiscal 2001.
Nozomu Kunishige, a senior analyst at Lehman Brothers Japan, said business growth in the consumer-finance field will decelerate gradually because of the decreasing population, potential hikes in interest rates and sharper competition for customers. Yet he expects the consumer-finance industry to continue to expand.
Another sign of consumer finance's strength in Japan: Some of the directors can be found in lists of the richest Japanese. Among Japan's top 100 taxpayers in 1998, 10, including Takefuji Chairman Yasuo Takei and Promise Chairman Ryoichi Jinnai, were from families running consumer-finance companies.
"There isn't the same sort of business overseas that specializes in unsecured consumer loans," said Futoshi Sasaki, a senior analyst with Daiwa Institute of Research. He said consumer-finance firms found a niche that can't be filled by banks, offering quick, unsecured short-term loans of small amounts to people with lower-than-average incomes.
Aiful and Lehman Brothers calculated that outstanding loan balances among consumer-finance companies totaled 7.2 trillion yen as of March 1999, up 10.8% from a year earlier and a 60% leap since 1994. The market is expected to reach 12.2 trillion yen in fiscal 2008, according to the estimates.
Investors are paying close attention to this thriving industry.
Kyoko Narita, a senior associate director of credit research at the Tokyo branch of Deutsche Securities Ltd., said there is no other industry with profitability that compares with the consumer-finance companies. "Because foreign investors are actively buying, bond ratings for major listed consumer lenders are about the same or even better than banks supported by public-fund injections," she said.
Sasaki of Daiwa Institute said: "Consumer-finance companies aren't asking for instructions and protection from the Finance Ministry and other monetary authorities; they have had to beef up their management culture to survive any economic condition. They have had to protect themselves by preparing systems for credit approval and by lowering the upper limit of lending rates."
Today the five major consumer-finance companies cap their interest rates at from 25.55% to 29.2% - not exactly a bargain for those who borrow, but analysts say the high rates won't slow growth. The companies are legally allowed to charge as much as 40.004%.
Narita said these companies can raise funds thanks to a law enacted in April that permits debt issuance by finance companies. She also said the companies are busy diversifying their business.
Acom and Promise made entries into the credit-card arena, while Sanyo Shinpan announced it would launch a joint venture with Sakura Bank and Nippon Life Insurance Co. to offer consumer-finance services.
The recent advances into the market by major foreign players should test the potential of the market in Japan.
GE Capital Global Consumer Finance bought Koei Credit Co., a Tokyo-based midsize consumer-finance firm, in January 1998 to gain a foothold in the industry. In November 1998, the GE Capital group company purchased Lake Co., the nation's largest unlisted consumer lender.
Sasaki of Daiwa Institute expects the market to consolidate. He sees major consumer-finance firms grabbing as much as 70% of the market in the near future. Aiful estimates that the five listed companies will grab 80% of the market in fiscal 2008.