Frequently Asked Questions - Banks and Other Financial Institutions

Non-Performing Loans (NPLs)
 
Q1   How much non-performing loans (NPLs) do Japanese financial institutions have?

A1
The total amount of NPLs of all deposit-taking financial institutions based on the definition of the Financial Reconstruction Law (FRL) as of end-March 2003 is 44.5 trillion yen. The figure decreased by 7.9 trillion yen from 52.4 trillion yen as of end-March 2002.
The total amount of NPLs of all banks based on the definition of the FRL as of end-March 2003 is 35.3 trillion yen. The figure decreased by 7.9 trillion yen from 43.2 trillion yen as of end-March 2002.

For details, please access the following:
*     Status of Non Performing Loans
 
Q2   Some people claim that the real total amount of NPLs is much larger than the figure announced by the Financial Services Agency (FSA). Is that true?

A2
Financial institutions in Japan are required to disclose their total amount of NPLs under the Banking Law, which requires the disclosure of risk management loans, almost equivalent to the ''Risk Element'' in the Industry Guides Guide 3. III Loan Portfolio C of the U.S. Securities and Exchange Commission (SEC), and the Financial Reconstruction Law, which requires the disclosure of loans based on another minute definition. Furthermore, FSA has been encouraged major banks to make rigorous asset assessment through special inspections, for ensuring the proper categorization of borrowers which reflect their latest business performances, market signals and other factors in a timely fashion. As mentioned above, FSA intends to identify the accurate amount of NPLs first, and dispose the NPLs then. We have also started an attempt to disclose the gap between major banks' self-assessment and FSA's inspection results under the Program for Financial Revival on an aggregate basis, which is deemed to further improve the accuracy of self-assessment.

Although there are claims that the actual amount of NPLs might exceed 100 trillion yen, their ''definitions of NPLs'' often include the loans for which principal and interest payments are being made as agreed upon, merely requiring the financial institution's attention. It is not appropriate to include such loans in the definition of NPLs.

For details, please access the following:
*     The Gap between Major Banks' Self-Assessment and the Result of FSA's Inspections (September 9,2003)
*     The Gap between Major Banks' Self-Assessment and the Result of FSA's Inspections (November 8, 2002)
 
Q3   Some people say that the disposal of NPLs would produce a large amount of unemployment under the current tough recession. Why is the acceleration of disposal of NPLs an urgent issue?

A3
NPLs mean loans for which borrowers fall behind their payment of interest and principal. If financial institutions be set with huge NPLs, their management will be under pressure, and shaky borrower companies who fail to meet their clients' needs and fall into management difficulties will remain indefinitely.
The disposal of NPLs will not only restore the management of financial institutions, but also play an important part in restructuring the Japanese industry and economy to adapt to consumers' needs and becoming strong enough to withstand the increasingly serious international competition.
To achieve this, we have steadly implemented various measures under the Program for Financial Revival according to the Work Schedule, in order to resolve the NPL problem by fiscal 2004 and build a stronger financial system that will sustain structural reform.
As NPLs of small/medium-sized and regional financial institutions need to be disposed of in consideration of their attributes, which are different from the attributes of major banks, we are working on ensuring the revival and sustainability of financial functions for small- and medium-sized enterprises (SMEs), based on various efforts during the ''intensive improvement period'' until fiscal 2004 under the Action Program concerning the enhancement of Relationship Banking Functions.

We cannot deny the possibility that company bankruptcies and unemployment might increase temporarily in conjunction with the disposal of NPLs. The disposal of NPLs, however, will facilitate redirecting of funds and resources into new growth areas, through increase in profitability of financial institutions and effective use of managerial resources by borrower companies. It is regarded as a necessary step for the Japanese economy's recovery.
Under the Program for Financial Revival, we put various safety-net measures in place to prevent any marked deterioration of financing environment for SMEs, which make up the majority of Japanese companies. According to the Program, we will facilitate SME financing more actively. In addition, the whole Government of Japan intends to make various efforts, such as fostering new industries and businesses.

For details, please access the following:
*     Program for Financial Revival
*     Action Program concerning enhancement of Relationship Banking Functions (Background and Basic Policy Concept / Outline) (March28,2003) (PDF)
*     Toward enhancing functions of Relationship Banking (March 27,2003) Available in Japanese (PDF)