| Research & Links / Japanese Financial Institutions / Non-bank Financial Institutions / Shoko Lenders | |
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| Research & Links / Japanese Financial Institutions / Non-bank Financial Institutions / Shoko Lenders | |
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(with some minor updates September 2002) SHOKO LOANS (small business loans) The consumer credit market consists of various financial institutions providing unsecured, non-guaranteed cash loans to individuals, home-equity loans, guaranteed consumer loans to individuals and commercial loans to small businesses. Shoko lenders focus on providing commercial loans to small businesses (known as shoko loans). The following report focuses on companies which are considered to be Shoko lenders while also including reference to other non-bank financial institutions which are active participants in this section of the consumer credit market i.e. provision of unsecured (and generally third-party guaranteed) commercial loans to small business. Small businesses requiring funds at short notice for unspecified purposes (such as temporary shortages in working capital) primarily turn to shoko lenders to supplement borrowings from banks, consumer lenders and other sources. NUMBER OF SHOKO LENDERS AND SIZE OF THE MARKET
Source: Zenkoku Kashikin Gyokai Rengokai (moneylenders trade association) There is no data available distinguishing the number of lenders to the corporate market which focus on provision of un-secured loans and hence would be classified as Shoko lenders but in a sample used for statistical purposes by the Zenkoku Kashikin Gyokai Rengokai lenders to the corporate market were classified as lenders with prime business focus of unsecured loans 111 (46%) and lenders with prime business focus of secured loans 129 (54%) Extrapolating this number would suggest that there were 2,035 shoko lenders as at 31 March 1997. Credit sales and consumer finance non-banks, as well as medium-sized financial institutions are also entering the shoko loan business and hence companies such as Aiful and ACOM which are generally classified as lenders of unsecured consumer finance to individuals are also competing in the shoko loan market.
Source: Zenkoku Kashikin Gyokai Rengokai (moneylenders trade association) Refer to Appendix II for further details regarding the volume of loans outstanding in the money-lending industry. * According to Ikko Corporation the size of Japan's shoko loan market (i.e. un-secured lending to the corporate market) as at 31 March 1998 was approximately JPY5 trillion. JOINT GUARANTOR Although physical collateral is not required with a shoko loan there is usually a requirement for a joint guarantor. Recent debate has focussed on the apparent practice of committing a joint guarantor to sign up for an amount higher than the initial loan and then not advising the joint guarantor about subsequent increases to the initial loan amount. TYPES OF SHOKO LOANS There are 2 main types of Shoko loans: note-based loans and common-law contract based loans. Note-based loans A borrower receives funds in exchange for writing a commercial promissory note (or multiple notes) drawn on a current account. At the loan's maturity, the lender deposits the note(s) for collection of the principal, interest and fees. Usually, the amount provided to the borrower is the principal value less interest and fees. In some cases, the borrower issues separate notes for settlement of the interest and fees. Note based loans tend to have short terms, typically three to four months, but are often renewed on the maturity of the initial notes. Due to the shorter terms of the loans, note based loans tend to have higher effective annual rates than common-law contract based loans. Common-law contract based loans A borrower simply signs a contract agreeing to pay the principal, interest and fees at some future date or dates, usually in a fixed or sliding monthly installment. In general, the average size of common-law contract based loans is smaller than that of note based loans because smaller businesses are less likely to have current accounts (and therefore notes) and are more likely to have smaller funding needs. Common-law contract based loans tend to have longer terms, generally up to five years. TYPES OF LOANS PROVIDED BY SHOKO LENDERS Although Shoko Lenders focus on unsecured lending to the corporate market they also conduct other forms of financing such as bill discounting and loans secured by real estate.
Source: Zenkoku Kashikin Gyokai Rengokai (1998 White Paper on Money Lending Industry) (Sample of lenders which focus on provision of unsecured loans to corporates)
Source: Zenkoku Kashikin Gyokai Rengokai (1998 White Paper on Money Lending Industry) (Sample of lenders which focus on provision of unsecured loans to corporates) According to Teikoku Databank, the major shoko lenders have default rates on the loans, which is lower than the level of other consumer finance companies. Although recent entrants to the shoko loan market such as ACOM and Aiful have lifted the profile of shoko lending such institutions have suffered higher default rates than the traditional shoko lenders. The low default rate of shoko lenders has been attributed to specialist know-how relating to credit small size of loans and lending diversification. There is also reference to the provision of guarantees by subsidiary companies. The credit system of the major shoko lenders involves, in addition to the initial credit check, a check of client details 1 week to 10 days following provision of the loan with at least one further check monthly. (Source: TDB Report 98-II, Teikoku Databank) FUNDING SOURCES The Law Concerning the Issuance of Non-bank Corporate Debentures (The Non-bank Bond Law, April 1999) introduced in May 1999, has enabled lenders that meet the criteria for registration to directly raise funds in the capital markets, by, for example, issuing corporate debentures and commercial paper for the purpose of making loans. This is only a recent change however, and to date the Shoko lenders have been particularly reliant on borrowings from financial institutions. Source: Zenkoku Kashikin Gyokai Rengokai (1998 White Paper on Money Lending Industry) (Sample of lenders which focus on provision of unsecured loans to corporates) Recently, data has come to light regarding the lending by financial institutions to two of the largest Shoko Lenders:
This highlights the fact that Citibank is the largest lender to Shohkoh Fund providing more than 50% of its loans. In addition, foreign banks are providing more than 30% of loans to Nichiei. INTEREST RATES & COMMISSIONS
Ikko states that some of their loans exceed the maximum rate established by the Interest Rate Regulation Law. Under Article 1, the excess interest charged is deemed invalid. However, when voluntarily pay the excess portion in question, these are deemed valid payments of interest under Article 2 of said law and under Article 43 of the Finance Industry Control Law. There are a few interpretations regarding the legality of a commitment fee under the current Interest Rate Restriction Law and the Capital Subscription Law (refer RELEVANT LEGISLATION) Further comments on the interpretation of the laws and definition of commissions is available from the Financial Law Board at http://www.flb.gr.jp/epage/edoc/publication01-e.pdf COMMISSIONS Shoko Lenders usually collect fees calculated as a percentage of the principal each time a loan is started or renewed. MAJOR INSTITUTIONS IN THE SHOKO LOAN MARKET
Source: Corporate web-sites (as at September 2002); Japan Company Handbook, Spring 1999 (Toyo Keizai Inc.); TDB Report, Teikoku Databank DIFFERENCE BETWEEN BANKS AND SHOKO LENDERS Shoko Lenders are non-banks and are therefore not permitted to take deposits but raise funds through bond issues, borrowings and other sources. DIFFERENCE BETWEEN BANK LOANS AND SHOKO LOANS Banks and other financial institutions still require collateral for loans. Thus, smaller companies that do not possess real estate or other large assets find themselves unable to raise the funds they require no matter how superior their technology or products. With Shoko loans, screening takes no longer than two or three days. Shoko loans in principle require no collateral and loan amounts are generally smaller, extending to a maximum of around 5 million yen each. Shoko loan customers are mainly small and medium-sized companies and owner-operated businesses. Loans extended are generally for working capital. Customers are those companies, which generally find it difficult to borrow funds for this purpose from banks or other financial institutions. This is because they are either too small despite good business performance, or because their corporate histories are too recent despite operating in high-growth business fields. The shoko loan is considered as a bridging finance to provide urgently needed capital. RELEVANT LEGISLATION There are a number of laws, which are particularly relevant to shoko loans including the Capital Subscription Law and Interest Rate Restriction Law, which regulate the maximum interest rate which may be charged.
THE NON-BANK BOND LAW, April 1999 Permits non-banks with 1 billion yen or more in shareholders' equity to use the proceeds from the issue of bonds, commercial paper and other debt instruments to make loans. Previously, non-banks were able to issue debt, but could use the proceeds only for such non-lending purposes as general corporate expenses or capital spending. Under the new law, a non-bank wishing to issue debt must file its intention with the MoF and provide disclosure about its bad debts (including information about past-due accounts, non-performing loans, loans with workouts and loans to bankrupt enterprises). The new law widens fund-raising options for companies. THE FINANCE INDUSTRY CONTROL LAW Pursuant to Article 3, shoko lenders which conduct money lending operations must be registered as a loan-business operator (renewable every 3 years) Pursuant to Article 43 when debtors voluntarily pay the excess portion of interest (as defined in the Interest Rate Restriction Law) such payments are deemed valid. CAPITAL SUBSCRIPTION LAW Under the Capital Subscription Law, the maximum permissible rate is 40.004% per annum, regardless of the loan amount. This rate came into effect from June 1991. Recent proposals from the government suggest that this rate will be reduced in the near future. On 2 December 1999, the ruling coalition announced plans to reduce the maximum rate to 29.2% and an amendment to the law is expected to be passed in the Diet. INTEREST RATE RESTRICTION LAW Under the Interest Rate Restriction Law, the maximum rate is 20% for loans of up to 100,000 yen, 18% for loans of 100,000 to 999,000 yen and 15% for loans of 1 million yen or more. Non-banks can charge more than the maximum rates under the Interest Rate Restriction Law and up to the 40.004% maximum under the Capital Subscription Law if the customer voluntarily agrees to pay the excess. Under both laws, the maximum rate pertains to interest plus certain fees and commissions, including guarantee fees, credit approval fees and other processing fees. Shoko lenders usually charge interest plus fees. Under the Interest Rate Restriction Law excessive interest is deemed invalid. However, when debtors voluntarily pay the excess portion, these are deemed valid payments under Article 2 of said law THE ANTI-BORYOKUDAN LAW Article 9 prohibits acts of violent demand including:
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