Citi, GE Worried About Japan Rate Cap Plan, Econ Impact
(HOLY SMOKES - Remember Mastercard doing an IPO soon - using the public as the final bagholder for all that uncollectable debt)
By James Simms
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--Citigroup Inc. (C), General Electric Co. (GE) and other foreign investors in Japan have been heavily lobbying the Japanese ruling party to prevent proposed lower interest rate caps that would cause the profitability of the consumer credit industry to nosedive and possibly cause a credit crunch that would hit the economy.
The outlook for the lucrative industry, which includes a high percentage of foreign shareholdings, is clouded after a ruling party panel released a plan last week to cut legal interest rates by a third to around 20%. A public backlash over reports of strong-armed debt collection tactics and high levels of personal bankruptcies prompted the Liberal Democratic Party's action.
Under the aegis of the Consumer Credit Study Group, the foreign firms and Codrington Corporate Governance, which represents institutional investors, say that a lower rate cap could cause a consumer credit crunch and harm consumption, which makes up 55% of the economy.
Burl Hays, a member of the study group and financial industry executive, said the government ought to put in the proper infrastructure before considering the lowering of maximum rates. This includes unified, mandatory credit reporting to prevent borrowers from over-borrowing, stricter licensing and regulation of the industry, and better disclosure to borrowers, he said, noting that these points were listed in the LDP report too.
"You don't want to risk something that could have negative consequences for the economy," Hays told Dow Jones Newswires.
(Citi,GE Worried About Japan Rate Cap Plan, Econ Impact-2-
Citing a Waseda University study, Hays said a rate cut to a maximum of 23% charged would cut off over 9 million borrowers - out of 20 million - because they would be deemed too risky to lend to at that lower rate. As a result, he said, that would knock 0.36 percentage point off gross domestic product growth because of less credit.
He noted that Waseda's Consumer Finance research department is partially funded by the Japan Consumer Finance Association.
Lowered caps also would have "a very significant negative impact" on the entire industry's profitability, he said. But the foreign and domestic industry's message, namely that lower interest rates won't fix the problem of people getting into debt over their heads, is being drowned out by simplified thinking that high rates are the culprit for the debt problems.
The group reiterated the points in materials sent to government officials and about 100 lawmakers recently.
"It seems that, based on Japan's own experience and the body of evidence from other markets, that interest rate regulation serves no beneficial purpose, and that the well-intentioned protections purportedly offered by these regulations are misguided at best, and harmful to economic development at the worst," the group said in a cover letter dated June.
Japan's parliament isn't expected to legislate the changes in the laws regulating interest rates until autumn, and it's unclear how long of a transition period the government may allow and what exceptions it might legislate.
The main proposal, however, to lower rates from 29.2% to between 15% and 20%, knocked down the shares of major firms like Aiful Corp. (8515.TO) and Takefuji Corp (8564.TO), and credit rating firms put them on watchlists for possible downgrades.
While there are indications that the LDP will phase in the caps over a period of years and possibly allow some exceptions, share prices of consumer lenders were highly volatile this week.
Comments Tuesday by the LDP's finance committee chairman in an interview with Dow Jones caused lenders Aiful and Takefuji to rise more than 8%.
"For example, when the rates are lowered to 20%, the current interest rates could be maintained for three years or it could be implemented - not necessarily three years later - but later," Yoichiro Esaki said. "It's necessary" to phase the changes in, he said.
Citigroup's consumer finance unit in Japan is CFJ KK and GE's is GE Consumer Finance, Ltd.
-By James Simms, Dow Jones Newswires; 813-5255-2929; james.simms@dowjones.com
-Edited by Chris Gallagher and Graham Norris
(END) Dow Jones Newswires
July 13, 2006 07:05 ET (11:05 GMT)
Asian Princess about to get it right in the kisser! |
