1. Consumer lending in Japan – susceptibility
to macro events and foray into new markets
In 2014, retail lending in Japan grew by 1% y-o-y. This is in sharp contrast to the nearly 8% growth in 2013 when Auto loans and card
loans showed very strong performances. While credit cards has witnessed a strong market in Japan for quite some time now, the
growth in auto loans can be attributed to the proposed VAT increase from 5% to 8%, which led consumers to make big-ticket
purchases immediately in order to save tax.
Apart from the unfavourable demographics, the consumer credit industry in Japan is heavily influenced by regulations and structural
changes. Most regional banks suffer from a trio of familiar and entrenched woes—extreme risk aversion, growing competition and
shrinking markets, as young people move from small towns to big cities such as Tokyo, Nagoya and Osaka. Like Japan’s “megabanks”
the regional banks mainly focus on lending to corporates, despite razor-thin margins. Big banks have the option of falling back on
their more profitable foreign operations, but regional banks are usually purely domestic.
For a long time now, Regional banks, have generated profit by investing in Japanese Government Bonds (JGBs) instead of retail
lending. The monetary easing by Bank of Japan (BoJ) has made this option increasingly unprofitable. Since JGBs became expensive,
Regional Banks have started falling back to profitable lending as the main source of revenue.
With the competition within Japan already very high (HHI index of nearly 3000), the Regional Banks segment looks set for
consolidation. Bank of Yokohama, and Higashi-Nippon Bank, a regional lender based in Tokyo, have agreed to integrate their
operations under a joint holding company in April 2016. Regional Banks have also started investing increasingly in foreign markets.
Gunma Bank, for example, aims to increase the balance of its overseas loans by 50 percent, to $506 million, in this fiscal year.
Lending specialist companies have had it tough ever since the Money Lending Business Act came into picture in 2010. The act lowered
the limit on cash advance services from 29.2% to 15-20% and the cap on total lending at one third of a borrower’s annual income,
which has resulted in cash advance services to become considerably less profitable for lending specialists. Since the act only applies
to specialist companies, banks and credit associations have increased its presence in cash advance products.
While the increase in demand for credit cards is a boon, given the decrease in margins and increase in competition, operational
efficiency and market expansion should be at the forefront for these companies. Companies like Acom, SMBC Consumer Finance,
and Aiful, which already have a presence in overseas markets, turned profitable in FY2013 after many years of struggle. Idemitsu
Credit has started operations in South-East Asia, in search of profitable markets. Moreover, lending specialists were crippled by the
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A key take away point here is, much of the growth in 2013 was more due to the significant macro-economic events than
improvements in the market conditions. The traditional issue in consumer lending in Japan is still prevalent i.e. financial
institutionshavesignificantdepositsbutveryfewlendingopportunities.Thelowdemandensuredthattherateofinterest
remained at a dismal 1.2% in 2014.
