FSA Newsletter March 2006

On January 20, 2006 the Financial Services Agency (FSA) released to the public the status of non-performing loans as it stood as of the end of September 2005.
A brief explanation of the status of non-performing loans as of the end of September 2005 is given as follows:

The non-performing loan balance of all banks (on the basis of loans subject to disclosure under the Financial Reconstruction Law) totaled 15.9 trillion yen as of the end of September 2005, a drop of 2.0 trillion yen from 17.9 trillion yen recorded in the period ending March 2005.
In terms of non-performing loan ratio, the figures calculated for major banks, regional banks, and all banks dropped in comparison to the figures recorded for the periods ending September 2004 and March 2005, respectively, each marking a record low since data on loans subject to disclosure under the Financial Reconstruction Law began to be released to the public (i.e, since the end of March 1999).

(Not

e) Non-performing loan ratio (= non-performing loans (loans subject to disclosure under the Financial Reconstruction Law) / total credit balance)

	Sep.04	March 05	Sep.05
Major banks:	4.7%	2.9%	2.4%
Regional banks:	6.3%	5.5%	5.2%
All banks:	5.3%	4.0%	3.5%

In particular, the NPL ratio of major banks decreased by 0.5 percentage points to 2.4%, from 2.9% as at March 2005 when the objective of halving the NPL ratio under the ''Program for Financial Revival'' (October 2002) was successfully achieved.

(Not	e) Objective of halving their non-performing loan ratio: to lower, by fiscal year 2004 (the period ending March 2005), the non-performing loan ratio of major banks to approximately half the level recorded for the period ending March 2002 (8.4%).

Non-performing loan ratios of regional banks have also been dropping steadily as a whole, as they are making progress in efforts to enhance region-based relationship banking functions.
We will continue to be committed to taking all possible steps in the supervision of financial institutions in the future, lest a non-performing loan problem should reemerge and hobble the Japanese economy.
For convenience regarding statistical data, we released one in which past data was put in time series as best as possible, including one that has been released up to now.

For further details, please visit the FSA's website and go to either ''End - September, 2005 (released on January 20, 2006)'' under ''Status of Non-Performing Loans,'' or ''The Status of Non Performing Loans as of end-September 2005 (January 20, 2006) '' under ''Press releases.''

When a financial institution makes various requests to a client, the client may meet such requests even if it goes against his/her will because of the fear that it might influence future lending decisions, etc. As financial institutions are prone to cause problems under the Anti-Monopoly Law as a result of exploiting their dominant positions, it is extremely important for financial institutions to build a proper system amid the diversification of financial instruments and services, to ensure confidence in financial institutions.
Under these circumstances, there was a regrettable incident recently, in which a financial institution was issued a recommendation decision by the Fair Trade Commission of Japan (JFTC) on the grounds of violating provisions of the Anti-Monopoly Law relating to the exploitation of dominant position when selling financial instruments.
With this in mind, on January 5, 2006, the Financial Services Agency (FSA) requested deposit-handling financial institutions in general to look into the following, including their respective systems, to fully ensure the appropriateness of financial transactions and the sale of financial instruments and services, etc., so that problems under the Anti-Monopoly Law would not arise as a result of exploiting their dominant positions:

Whether or not the appropriateness of transactions, etc. is ensured, bearing in mind that a financial institution is prone to be in an influential position with respect to the client through loans, etc.; and
In particular, whether or not inquiries and complaints received by the financial institution in relation to loans, etc. are analyzed and examined and improvements are made in response to them in a speedy and sufficient manner, in view of 1. above.

In the event of any problems, financial institutions are required to take proper action by rectifying the situation.
The FSA will respond to the situation as necessary in the normal course of inspection and supervision, on the premise that each financial institution has made such efforts.

1. Achievements made by RFIs

The following is a summary of the major trends with respect to the achievements made by RFIs in business revitalization and facilitation of small and medium-sized enterprises (SMEs) financing in the first half of FY2005.

(1)

Strengthening Functions to Support Creation and Opening of New Businesses
There is a large increase in financing by loan products aimed at supporting startups. Investments in company promotion funds are also increasing. To be specific, a number of RFIs are striving to acquire expertise and enhance screening systems by cooperating with outside institutions in the fields with growth prospects, such as agriculture, medical care and welfare, while some RFIs provide support to venture companies spun off from universities.

(Reference) Cumulative Total from FY2003 to First Half of FY2005 (same below)

Financing by loan products aimed at supporting startups:		7,500 cases, ¥68.7 billion
		(4,700 cases, ¥42.9 billion)
Investments in company promotion funds		¥36.8 billion
		(¥24.7 billion)

* Figures in parentheses correspond to the cumulative total in the Intensive Improvement Period (FY2003-FY2004) (same below)

(2)

Strengthening Functions of Management Consultation and Support for Client Companies
RFIs are making proactive efforts in promoting business-matching, for example by holding business networking meetings, resulting in an increasing number of deals being signed. Such efforts include hosting business networking meetings jointly with other RFIs in the region, and providing information through utilization of their overseas branches to support overseas businesses of local companies.
RFIs are also proactive in their attempt to upgrade ''need attention'' loans to the ''normal'' category, as exemplified by the increasing variation of measures to assist management improvement. Under such circumstances, at regional banks (regional banks and regional banks II), about ten percent of debtors which were given assistance for management improvement in the first half of FY2005 (excluding those classified as ''normal''), or approximately 2,800 of such debtors, saw improvement in their respective business conditions and debtor classifications.

(Reference)

Deals signed as a result of business matching:		22,600 cases (16,600 cases)
Ratio of upgraded debtors to those receiving assistance for management improvement (excluding those classified as ''normal''):		10.1% ^{[Note 1]} (10.2%)^{[Note 2]}

[Note 1] Results of the first half of FY2005
[Note 2] Average during FY2003-FY2004 (on a semiannual basis)

(3)

Proactive Efforts for Business Revitalization
RFIs continue to make progress in developing systems to facilitate business revitalization, and the number of debtors formulating revitalization plans with the assistance from SME Revitalization Support Councils is steadily increasing. Moreover, achievements are being made with the utilization of corporate reconstruction funds. Specific examples utilizing such measures include collective revitalization of a spa resort as a whole, and turnaround of a construction business.

(Reference)

Debtors having formulated revitalization plans with the assistance from SME Revitalization Support Councils:		716 cases, ¥743 billion (503 cases, ¥572.7 billion)
Investments in corporate reconstruction funds:		¥34.4 billion (¥27.7 billion)
Debt-to-debt swaps:		89 cases, ¥40.2 billion (64 cases, ¥33.7 billion)

(4)

Promoting Loans without Excessive Reliance on Collateral and Guarantee
Both the number of cases and monetary amount of loans which do not excessively rely on collateral and guarantee are increasing as a result of proactive promotion efforts, including through the expansion of loan products utilizing financial covenants and business loans using credit scoring models.
The number of loans secured by chattel and claims against third parties are also increasing, including those utilizing chattel registration system, which show that efforts to diversify SME financing methods are steadily yielding results.

(Reference)

Loans utilizing financial covenants:		8,300 cases, ¥225.2 billion (5,700 cases, ¥129.4 billion)
Loans using credit scoring models:		443,000 cases ¥4.1 trillion (327,000 cases, ¥2.9 trillion)
Loans secured by chattel and receivables:		40,500 cases, ¥380 billion (29,000 cases, ¥283.9 billion)

2. Evaluation of RFIs' Efforts and Future Challenges

(1)

Views on RFIs' Efforts by RFIs and Users
While a large part of both RFIs and users show positive and constructive assessment on RFIs' efforts in general, some point out, as shown below, that not enough solid accomplishments have been made and that RFIs' efforts are insufficient.

RFIs' views:	Not enough solid accomplishments have been made with regard to proactive efforts for business revitalization and efforts to upgrade ''need attention'' loans to the ''normal'' category.
Users' views:	Not enough personnel have expertise and business judgment abilities required in business revitalization and management guidance. The situation remains unchanged in that RFIs are still dependent on collateral and guarantee.

(2)

Evaluation of RFIs' Efforts and Future Challenges
Considering the above, the evaluation of RFIs' efforts and future challenges are as follows.

(i)		RFIs continue to proactively make efforts to strengthen functions of management consultations and support for client companies such as business matching, as well as efforts to promote loans without excessive reliance on collateral and guarantee aimed at facilitating SME financing. Their efforts to support creation and opening of businesses are also making steady progress.
(ii)		On the other hand, although RFIs are developing systems and enhancing efforts in the field of business revitalization, it may take some time for them to yield results in concrete terms. In any case, the Promotion Plans were formulated and announced only recently--at the end of August 2005. RFIs will need to continue making efforts to enhance region-based relationship banking functions into the future.

1. Background
On July 19, 2005, the Financial Services Agency (FSA) launched consultation services with the opening of the Counseling Office for Financial Services Users (hereinafter referred to as ''Counseling Office'') assigned to serve as a one-stop center to handle users' inquiries, consultation requests, opinions, etc. on financial services, etc. (hereinafter referred to as ''consultation requests, etc.''), with the aim of improving the user convenience of financial services and putting the received information to effective use in financial administration. The number of consultation requests received by the Counseling Office from users, the gist of major consultation cases and other such information are released to the public on a quarterly basis. The consultation requests, etc. received, their characteristics and other related information for the quarter commencing October 1, 2005 and ending December 31, 2005 are as follows.
2. Outline of Public Release
(1)	We received a total of 9,392 consultation requests, etc. between October 1, 2005 and December 31, 2005. The average number of consultation requests, etc. received per day was 159, an increase from 126 per day received in the previous period from July 19, 2005 to September 30, 2005. The increase is deemed to be attributable to many consultation requests, etc. received from users partly due to administrative action taken against financial institutions, in addition to the impact of enhancements to the framework to deal with consultation requests, etc. by increasing consultation staff from 10 to 15 members.
(2)	By subject, the number of consultation requests, etc. related to depositing, financing, etc. totaled 2,283 (24%), insurance products etc. totaled 3,198 (34%), investment products, etc. totaled 2,974 (32%), cash loans, etc. totaled 813 (9%) and financial administration in general and other issues totaled 124 (1%).
(3)	The following characteristics, etc. were identified with respect to each subject area.
	Depositing, financing, etc.: With respect to financing services, we received consultation requests, etc. concerning the execution and repayment of loans. With respect to depositing services, we received consultation requests, etc. on the system of explanation to be provided when a deposit is made, handling of counterfeit/stolen cash cards, the identification procedures, etc. Insurance products, etc: We received consultation requests, etc. concerning insurance payments, insurance companies' responses to insurance claims, etc. Investment products, etc.: We received consultation requests, etc. relating to foreign exchange margin trading businesses, problems in securities companies' computer systems, brokers of unlisted shares, how to use Electronic Disclosure for Investors' NETwork (EDINET), etc. Cash loans, etc.: We received consultation requests, etc. relating to inquiries about the existence and reliability of moneylender registration and improper conduct.
(4)	Consultation requests, etc. received by the Counseling Office included information that would be useful for inspection and supervision purposes (see Note). For the purpose of protecting users in general and improving user convenience, we make use of such valuable information in financial administration, when conducting verification as part of inspection, conducting interviews for supervision, issuing reporting orders and taking administrative action with respect to the financial institution concerned.
	(Note) Examples of useful information for inspection and supervision purposes:
	Information on credit crunch and oppressive debt collection; Information on sale of financial products to a borrower by a financial institution exploiting its dominant position; Information on improper conduct by salespersons, etc. of an insurance company (such as abetting non-disclosure, paying insurance premiums on behalf of the policyholder, producing a contract without authorization and borrowing someone else's name); Information on improper conduct by foreign exchange margin trading businesses (such as making unsolicited calls to general customers, making assertive judgments, trading without authorization, and delaying refund of balance, etc.); and Information on dealings with securities companies over the Internet.
3. Approach to Future Actions
The Counseling Office was established as part of measures designed to enhance the framework for providing information and dealing with consultation requests, etc. in order to protect users under the Program for Further Financial Reform. The FSA will continue to run the Counseling Office in an appropriate fashion, including summarizing and publishing the number of consultation requests, etc. received and the gist of major consultation cases on a quarterly basis, in order to realize the ideal financial system pursued under the Program for Further Financial Reform, that is, a financial system with high user satisfaction.

(1)

Overview of interview results: ''Lending trend in SME financing over the most recent three months''

[By Region]

While the results varied between regions, the majority of interviewees answered ''Turned positive'' or ''Turned somewhat more positive'' in the Kanto, Tokai, Shikoku, Kyushu and Okinawa regions. Those who responded ''Turned negative'' or ''Turned somewhat more negative'' accounted for less than 10% in all regions. Judging from these figures alone, facilitation of SME financing appears to be progressing.

[By Type of Financial Institution]

Trend over Most Recent 3 Months	Major Banks		Regional Banks, Second-tier Regional Banks		Shinkin Banks, Credit Unions		Government- affiliated Financial Institutions		Total
1. Turned positive	21	9.5%	43	10.8%	65	16.9%	95	23.0%	224	15.8%
2. Turned somewhat more positive	44	19.9%	143	36.0%	129	33.5%	152	36.8%	468	33.1%
3. Unchanged	144	65.2%	180	45.3%	173	44.9%	145	35.1%	642	45.3%
4. Turned somewhat more negative	10	4.5%	26	6.5%	14	3.6%	20	4.8%	70	4.9%
5. Turned negative	2	0.9%	5	1.3%	4	1.0%	1	0.2%	12	0.8%
Total	221	100.0%	397	100.0%	385	100.0%	413	100.0%	1416	100.0%

(Note 1)	SME Financing Monitoring is not a fixed-point survey in which the survey is conducted with the same interviewees every time.
(Note 2)	The table above shows the breakdown of valid responses and does NOT include non-responses and unclear responses. For this reason, the number of interviewees is not consistent with the total number of responses.

- Reasons given by respondents who selected ''4. Turned somewhat more negative'' or ''5. Turned negative'' in the table above

Reasons given for Answer 4 or 5 above	Major Banks		Regional Banks, Second-tier Regional Banks		Shinkin Banks, Credit Unions		Government- affiliated Financial Institutions		Total
Refusal of new loan requests	6	30.0%	12	30.0%	5	18.5%	12	48.0%	35	31.3%
Collateral & guarantee	2	10.0%	15	37.5%	11	40.7%	3	12.0%	31	27.7%
Interest rates	1	5.0%	0	0.0%	1	3.7%	0	0.0%	2	1.8%
Lending terms	5	25.0%	4	10.0%	4	14.8%	3	12.0%	16	14.3%
Loan assessment procedures	4	20.0%	5	12.5%	4	14.8%	5	20.0%	18	16.1%
Other	2	10.0%	4	10.0%	2	7.4%	2	8.0%	10	8.9%
Total	20	100.0%	40	100.0%	27	100.0%	25	100.0%	112	100.0%

(Note)

As a single interviewee may give multiple answers, the total number of answers 4 and 5 above (82) is not consistent with the total number of the responses in the table above (112).

(2)

Overview of interview results: ''Actual status, etc. of SME financing in the respective regions from the viewpoint of SMEs''

Interviews were conducted on the following eight topics regarding the actual status, etc. of SME financing in the respective regions from the viewpoint of SMEs:

[Interview Topics]

(a)	Stance to lending
(b)	Collateral and guarantee
(c)	Management guidance and business startup or revival assistance
(d)	System of providing explanation when lending
(e)	Quality and ability of financial institutions
(f)	Period of loan assessment
(g)	Interest rates
(h)	Other

Main comments received with respect to each topic are as follows:

(a)	Comments on actual status of stance to lending
	Financial institutions' stance to lending is positive. (Hokkaido, Tohoku, Kanto, Tokai, Hokuriku, Kinki, Chugoku, Shikoku, Kyushu, Fukuoka and Okinawa) Can acknowledge their stance to actively tap new borrowers when approached by financial institutions and head office staff who had never approached before. (Kanto and Hokuriku) There are hardly any reports on credit crunch and oppressive debt collection. (Hokkaido, Tohoku, Tokai, Hokuriku, Kinki, Shikoku and Kyushu) There is a tendency among financial institutions to cherry-pick companies, and their stance to lending is becoming increasingly polarized. (Hokkaido, Tohoku, Chugoku, Shikoku and Fukuoka) While an increasing number of products have ''sales points'' based on unsecured loans, unguaranteed loans and speedy loan approval assessment, lenders are in a dominant position (as exemplified by the diversification of risks by interest-rate top ups and assessment based on scoring system) and the borrowers' satisfaction is far from fully reflected. (Kinki)
(b)	Comments on actual status of collateral and guarantee
	There is a wider choice of products due to the increasing number of unsecured, unguaranteed loan products, etc. (Hokkaido, Tohoku, Tokai, Kinki, Chugoku, Shikoku, Kyushu, Fukuoka and Okinawa) Financial institutions' stance is becoming less collateral-oriented. (Hokuriku and Kinki) Focus is shifting from collateral to cash flow. (Fukuoka) The response of financial institutions is changing, as exemplified by cases in which loans were executed in the patent-pending stage of intellectual property and cases in which the company's technological capabilities were taken into account. (Hokkaido) Loans guaranteed by credit guarantee corporations are given priority. (Hokuriku, Kinki and Chugoku) Financial institutions' stance to lending remains dependent on collateral and guarantees. (Hokkaido, Tohoku, Tokai, Hokuriku, Kinki, Chugoku, Shikoku, Kyushu, Fukuoka and Okinawa) Although the lineup of unsecured and unguaranteed loan products is being enhanced, financial institutions' stance to focus on collateral and guarantee remains unchanged, as exemplified by strict assessments. (Hokkaido, Tohoku and Kinki)
(c)	Comments on actual status of management guidance and business startup or revival assistance
	Financial institutions have started to actively make efforts in management guidance, including establishing management consulting divisions. (Hokkaido, Tohoku, Tokai and Kinki) The fact that financial institutions are giving business-matching opportunities to companies is appreciated, including cross-industrial social events and inspection tours. (Tohoku, Kanto, Hokuriku, Kyushu, Fukuoka and Okinawa) There is a need to improve the support framework, including developing an organization to support business startups and cooperating with certified tax accountants' associations, Chambers of Commerce and Industry, Societies of Commerce and Industry, etc. (Hokkaido and Kyushu) Financial institutions are just haphazardly recommending borrowings in the interest of their own profits, and are not providing guidance with a view to nurture companies. (Tohoku, Hokuriku, Chugoku, Shikoku, Kyushu and Fukuoka) Although loan facilities for startups have been enhanced, there is a need to improve loan facilities to meet the demand for funds three to five years after the inauguration of business, when more funds are needed. (Kinki)
(d)	Comments on system of providing explanation when lending
	Financial institutions have improved their system of providing an explanation, and even in cases where loan applications are refused, they carefully provide a sufficient explanation and are getting better at dealing with complaints. (Hokkaido, Tohoku, Kinki, Chugoku, Shikoku, Kyushu, Fukuoka and Okinawa) Efforts in relationship banking are proving effective, as more customers are saying that they have been given a careful, in-depth explanation recently. (Tokai, Hokuriku and Chugoku) Financial institutions' responses are poor in some cases in that the explanation varies between staff and there is no explanation provided on the progress status when the assessment takes a long period of time. (Tokai, Kinki, Hokuriku and Fukuoka) Financial institutions should conduct more training schemes, etc. as their ability to provide an explanation of loan facilities, etc. remains poor. (Shikoku) There were cases in which an approved loan application was suddenly overturned and rejected, resulting in cash flows problems. (Chugoku)
(e)	Comments on actual status of quality and ability of financial institutions
	There is an increasing number of staff who can see the future potential of companies, without assessing companies based solely on their sales. (Tohoku and Hokuriku) Financial institutions appear to have improved their discerning eyes, as there is an increasing number of personnel with specialized knowledge. (Hokkaido, Tohoku, Tokai, Hokuriku, Kinki, Kyushu and Okinawa) The quality, ability, etc. of the branch manager and staff vary between individuals, which affects lending decisions in some cases. (Tohoku, Kanto, Kinki, Hokuriku, Tokai, Chugoku and Kyushu) Financial institutions are making progress in introducing a scoring system, but they are lagging behind in qualitative assessment. (Kanto and Fukuoka)
(f)	Comments on period of loan assessment
	The assessment period is becoming shorter overall, resulting in speedy responses. (Hokkaido, Tohoku, Tokai, Hokuriku, Kinki, Chugoku, Shikoku, Kyushu, Fukuoka and Okinawa) There is a trend towards shorter assessment periods, possibly due to the development of unsecured, unguaranteed loan products. (Chugoku) Assessment is becoming more time-consuming due to the increasing number of cases in which the head office is involved. (Tohoku and Kyushu)
(g)	Comments on actual status of interest rates
	Interest rates are being set properly according to the management circumstances of the company, and there have been no reports of interest rates being set unfairly. (Hokkaido, Kinki, Kyushu and Okinawa) There is a declining trend in interest rates, possibly due to fierce competition among financial institutions. (Tohoku, Tokai and Kyushu) Interest rates vary between companies depending on the credit rating based on the financial position of the company. (Hokkaido, Tohoku, Kanto, Hokuriku, Kinki, Chugoku, Shikoku and Fukuoka)
(h)	Other Comments
	Companies want to tap new clients. While financial institutions are making SME business-matching efforts, referral of more small companies would be appreciated. (Fukuoka) Financial institutions should disclose debtor classifications to borrowers and show what kind of improvements need to be made in order to be classified in a superior grade. (Tohoku) An increasing number of companies are dealing with more than one financial institution, due to their experiences of credit crunch and other such problems in the past. (Hokuriku)

(3)

Overview of interview results: ''Case examples showing the penetration of measures for facilitating SME financing''

In SME Financing Monitoring, a specific theme relating to inspection and supervision is set each time, and a survey is conducted accordingly with respect to cases showing the penetration of measures for facilitating SME financing.
The theme for the latest Monitoring was the same as in the previous Monitoring as follows.

Degree of SMEs' awareness of the Supplementary Issue to the Financial Inspection Manual [for Small- and Medium-Sized Enterprise Financing] (revised version)

[Main Comments Received]

SMEs do recognize the Supplementary Issue to the Financial Inspection Manual itself but have little interest in the details.
Some SMEs which are conscious of medium/long-term cash flows and management plans are aware of the content of the Supplementary Issue to the Financial Inspection Manual, but it is still not widely accepted among many SMEs.
The Supplementary Issue to the Financial Inspection Manual is spreading, albeit at a slow pace, through leaflets placed on the counter, individual management guidance, group consultation sessions, etc.
The Supplementary Issue to the Financial Inspection Manual should be made common knowledge by holding lectures and by placing an advertisement in newspapers.

3. How the ''SME Financing Monitoring'' Results Are Utilized
(1)	Interviews We conducted interviews with individual financial institutions in regards to their action policies, systems, etc. by making effective use of the information on those financial institutions obtained from SME Financing Monitoring.
(2)	Requests at Discussion Meetings (Utilized by FSA) We present cases acquired from SME Financing Monitoring at monthly discussion meetings held between top officials of the FSA and representatives of business associations and on other occasions. More specifically, we request participants to: further facilitate the supply of funds to sound SMEs, including loans focusing on cash flows from business activities without excessively relying on collateral and guarantees; provide a sufficient explanation that could gain customers' understanding and convince them, in consideration of the past business relationship and the customers' knowledge, experience and asset positions; make the Supplementary Issue to the Financial Inspection Manual common knowledge; and so on.
(3)	Utilization at Conference for Regional Financing Facilitation (Utilized by Local Finance Bureaus, etc.) On various occasions including the semiannual Conference for Regional Financing Facilitation in each prefecture (consisting of financial authorities, small- and medium-sized and regional financial institutions and relevant business associations) and meetings between top officials of Local Finance Bureaus and representatives of financial institutions, we urge participants to develop a system to provide an explanation to customers and enhance consultation and complaint-handling functions, and request them to make efforts to facilitate SME financing.