The Abe cabinet agreed on Oct. 31 to submit a Diet bill that would abolish the difference between the maximum interests a lender can charge (29.2% per year) and the maximum interest that the lender has legal recourse to recover (15-20%). The measure will be fully implemented over three years after the enactment of the amendment, so the nation will have time to adjust. Still, the transition will prove to be wrenching one, fraught with uncertainties. Here's the reason why I'm scared:
I've always worried about many of the borrowers abandoned by consumer credit companies being forced to resort to even more usurious and dangerous underground sources of financing. Well, according to the Federation of Credit Research Bureaus (you'll have to trust the Nov. 1 Yomiuri on this; good luck trying to find the information on the FCRB website), there were 2.5 million multiple-debtors (defined as people who owe money to 5 or more consumer credit companies) as of last May. Surely this figure is inflated by the huge number of no-fee, incentive-laden credit cards that every department store or supermarket chain and every other retail outfit give away like tissue paper. Still, it is sobering that, even by an estimate from the business side, which has every incentive to downplay the danger, roughly one out of every 50 Japanese, including babies and centenarians, a multiple-debtor.
How about the actual interest these businesses are charging? According to a study group in the Tokyo University of Information Sciences the seven major consumer lending companies were lending money to more than 90% of their customers at rates above the 20% limit. Again, we'll have to take Yomiuri's word for it (you can apparently ask this guy about it), but eye-balling a highly unsatisfactory bar chart (I hate all charts that do not have actual numbers in them) tells me roughly 80% of the customers are being charged upwards of 25%, and the overall average probably comes in around 26%. So, if I'm guessing correctly, other things being the same, over the next three years, the consumer lending companies will have to absorb the equivalent of a 23% percentage point drop in revenue.
That's at a time when they are borrowing at 1-3% interest from the banks. (So that's what the banks have been doing with my 0.1% interest-rate deposits. But I digress.) That still looks like a lucrative 17-19% margin. But remember, it's a very high-overhead, high-default business with cutthroat competition, and the number of consumer lending companies have been falling precipitously since their 1999 peak. (For English language stats, look here.) Imagine how the businesses will be squeezed when interest rates go up.
As lenders adopt ever more sophisticated lending methods and technologies, some borrowers will undoubtedly reap the benefits of a lower maximum interest rate, but others will not be considered creditworthy at the new rates. Many of the latter will hopefully repent and borrow no more, but the remainder will turn to less desirable, less legitimate sources. The government as well as NGOs will surely step in to help the overburdened. But, even if they see only a small proportion of the one-in-50 multiple borrowers falling through the cracks, they will have their hands more than full as they step in between hapless spendthrifts and the by-definition criminal elements.