FSA Newsletter December 2005
Minister Yosano takes over the post from former Minister Ito (November 2) Parliamentary Secretary Gotoda greets the First Subcommittee of the Financial System Council (November 22)
Minister Yosano takes over the post from former Minister Ito (November 2)   Parliamentary Secretary Gotoda greets the First Subcommittee of the Financial System Council (November 22)
Table of Contents
[TOPICS]
[Explanation of Laws and Regulations]
[Primer on Financial Literacy]
[Hot Picks from the Financial World]
[Notice]
[Topics]

Approaches to the Disposal of the Financial Assets (Preferred Stocks, etc.) Acquired through Capital Injections of Public Funds


On October 28, 2005, the Financial Services Agency (FSA) released to the public ''Approaches to the Disposal of Financial Assets (Preferred Stocks, etc.) Acquired through Capital Injections of Public Funds'' (hereinafter referred to as the ''Approaches''), upon sorting out approaches on how the preferred stocks, etc., acquired through capital injections of public funds (hereinafter referred to as the ''Preferred Stocks'') should be disposed of, pursuant to the ''Program for Further Financial Reform''.
From the perspective that ''it is appropriate to consider it a basic principle to ensure collection of profits accruing on the public funds as the fruit of the stabilization of the financial system, while continually abiding by the capital policy of each Recapitalized Financial Institution as before, in response to a phase transition in the Recapitalized Financial Institutions, placing more emphasis from the standpoint of ''taxpayers' interest''.'' The Approaches stipulates that:
(i)   Disposal should primarily be made upon request by each Recapitalized Financial Institution;
(ii)   It is also necessary to be ready to take appropriate and versatile actions that are founded on the terms of Preferred Stocks, including the conversion option, while taking into account various factors, such as the terms of Preferred Stocks and up-to-date stock price movements;
(iii)   It is also necessary, as before, to pay attention to maintaining sound management of the Recapitalized Financial Institutions and avoiding negative impacts on the market; continue to abide by the capital policy, etc., of each Recapitalized Financial Institution for the purpose of proceeding smoothly with the disposal as much as possible; and consult with the Recapitalized Financial Institution sufficiently to consider specific measures for dealing with Preferred Stocks.

Following this announcement, ''Immediate Guideline for Disposal of Preferred Stocks, etc. Acquired through Capital Injection of Public Funds'' (hereinafter referred to as the ''Immediate Guideline'') was released to the public on the same day by the Deposit Insurance Corporation of Japan (DICJ), which is responsible for the disposal of Preferred Stocks, as a basic guideline for disposal procedures. This is a revised version of ''Immediate Guideline for Disposal of Preferred Stocks Acquired through Capital Injection'' which stipulated disposal procedures for the sale of preferred shares issued to strengthen the capital base or the repayment proposal of public funds (July 8, 2004).
(Note: Points of the DICJ Immediate Guideline)
- The disposal should primarily be made up on request by each Recapitalized Financial Institution
- Under favorable circumstances to make the disposition in view of the terms and stock price movements of Preferred Stocks (i.e., when a certain condition is met, such as the price of the common stock is maintained for about 30 consecutive trading days at approximately more than 150% of the conversion price)
- Complete attention should be paid to maintaining sound management of Recapitalized Financial Institutions and avoiding negative impacts on the market, as before

The FSA is ready to take appropriate actions in line with the above policies.

*
For further details, please see ''Approaches to the Disposal of the Financial Assets (Preferred Stocks, etc.) Acquired through Capital Injections with Public Funds'' (October 28, 2005) , under ''Press Releases'' on FSA's Homepage.
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Summary of Results on ''Small- and Medium-Sized Enterprise Financing Monitoring (Conducted in August 2005)''


The ''Small- and Medium-Sized Enterprise Financing Monitoring'' is performed on a quarterly basis by employees of the Local Finance Bureaus and Offices with the help of Chambers of Commerce and Industry etc. for the purpose of accurately grasping the actual status, etc. of small- and medium-sized enterprise (SME) financing viewed from the perspectives of SMEs in the respective regions, as part of efforts towards facilitating SME financing.
The Financial Services Agency (FSA) recently summarized and released to the public the following results of the August 2005 SME Financing Monitoring.
The FSA is poised to continue working on facilitating SME financing by, for instance, actively comprehending voices raised in real scenes of SME financing through the Monitoring and using the findings as important information in our conduct of inspections and supervision of financial institutions.

1.
 Subjects of Monitoring
  We conducted interviews with a total of 453 individuals (from 176 organizations) in the 47 prefectures nationwide who are involved with management consulting in such organizations as Chambers of Commerce and Industry, Federations of Societies of Commerce and Industry, Societies of Commerce and Industry, Small Business Associations, Federations of Chambers of Commerce and Industry, and Small and Medium Entrepreneurs Associations.
 
Organization Category No. of Interviewees
 (No. of Organizations)
Chamber of Commerce and Industry 169 (68)
Society of Commerce and Industry 92 (65)
Federation of Societies of Commerce and Industry 155 (24)
Small Business Association 27 (14)
Federation of Chambers of Commerce and Industry 4 (2)
Small and Medium Entrepreneurs Associations 6 (3)
Total 453 (176)
(Note)  As the Monitoring is not a fixed-point survey whereby inquiries are conducted with the same interviewees every time, the number or makeup of interviewees may be different for each inquiry conducted.

2.
 Overview of Interview Results
 
(1)  Overview of interview results on ''Lending trend in SME financing over the most recent three months''
  While the results vary between regions, ''Turned positive'' and ''Turned somewhat more positive'' answers take up a majority in the Tohoku, Tokai, Hokuriku, Kinki, Chugoku and Shikoku regions. The percentage of ''Turned negative'' and ''Turned somewhat more negative'' answers is under 10% in 10 of the 11 regions.
 
2.Overview of Interview Results
(Reference)
Trend over the most
recent 3 months		 Major banks Regional Banks,
Second-Association regional banks		 Shinkin banks Credit unions Government-affiliated financial institutions Total
1.  Turned positive
22 13.2% 35 10.4% 36 11.2% 54 16.4% 147 12.7%
2.  Turned somewhat more positive
36 21.6% 102 30.4% 111 34.5% 100 30.4% 349 30.3%
3.  Unchanged
99 59.3% 179 53.4% 166 51.6% 155 47.1% 599 52.0%
4.  Turned somewhat more negative
9 5.4% 17 5.1% 8 2.5% 14 4.3% 48 4.2%
5.  Turned negative
1 0.6% 2 0.6% 1 0.3% 6 1.8% 10 0.9%
Total 167 100.0% 335 100.0% 322 100.0% 329 100.0% 1153 100.0%
(Note 1)  The Monitoring is not a fixed-point survey whereby inquiries are conducted with the same interviewees every time. As there is no consistency between the numbers of interviews etc. conducted by the respective Local Finance Bureaus (i.e., the numbers vary) due to circumstances etc. on the part of interviewees, the data is presented here as ''reference.''
(Note 2)  The table above shows the breakdown of valid responses and does not include non-responses and unclear responses.
(Note 3)  For the reasons described in Notes 1 and 2 above, the number of interviewees and the total number of responses do not match.

· Grounds given by those who selected ''4. Turned somewhat more negative'' or ''5. Turned negative'' in the table above
Grounds for Answer 4 or 5 above Major banks Regional Banks, Second-Association regional banks Shinkin banks
Credit unions		 Government-affiliated financial institutions Total
Refusal of new loan requests 6 35.3% 11 40.7% 4 40.0% 7 43.8% 28 40.0%
Collateral and guarantee 4 23.5% 8 29.6% 2 20.0% 5 31.3% 19 27.1%
Interest rates 0 0.0% 2 7.4% 3 30.0% 1 6.3% 6 8.6%
Lending terms 3 17.6% 2 7.4% 0 0.0% 0 0.0% 5 7.1%
Loan assessment procedures 1 5.9% 4 14.8% 0 0.0% 2 12.5% 7 10.0%
Other grounds 3 17.6% 0 0.0% 1 10.0% 1 6.3% 5 7.1%

Total

 17 100.0% 27 100.0% 10 100.0% 16 100.0% 70 100.0%
(Note)  As a single interviewee may give multiple answers, the total number of answers 4 and 5 (58) and the total number of the responses in the table above (70) do not match.
 

(2)
 Overview of interview results on ''Actual status, etc. of SME financing in the respective regions viewed from the perspectives of SMEs ''
 Interviews were conducted on the following eight topics regarding the actual status etc. of SME financing in the respective regions viewed from the perspectives of SMEs:
[Details of Interview Topics]
 
A.  Lending attitude
B.  Collateral and guarantee
C.  Management guidance and business startup or revival assistance
D.  Attitude in providing explanation when lending
E.  Quality and ability of financial institutions
F.  Period of loan assessment
G.  Interest rates
H.  Other


 Main comments made with respect to each topic are as follows:
      A.  Comments made with respect to the actual status of lending attitude
  • Financial institutions show a positive lending attitude and very few grievances on lending crunch or oppressive debt collection have been reported. (Hokkaido, Tohoku, Kinki, Shikoku and Kyushu)
  • The lending attitude is becoming increasingly positive. (Hokuriku, Tokai, Kinki, Chugoku and Okinawa)
  • In addition to financial showings, financial institutions now consider future prospects and business plan content as well. (Okinawa)
  • Although no grievances on lending crunch or oppressive debt collection have been reported, financial institutions have not changed their traditional practice of staunchly requiring a credit guarantee corporation's guarantee and just do not appear to be positive about lending money at their own risk. (Shikoku)
  • There is a difference, or dichotomization, in lending attitude depending on the financial conditions of the borrower company. (Hokkaido, Tohoku, Kanto, Kinki, Shikoku, Kyushu, Fukuoka and Okinawa)
      B.  Comments made with respect to the actual status of collateral and guarantee
  • The attitude emphasizing collateral is weakening. (Hokkaido, Hokuriku and Shikoku)
  • Emphasis has shifted from collateral to cash flow. (Kanto)
  • Better lineups of products that do not rely on collateral or guarantee are now offered and are used as well. (Kanto, Tokai and Kinki)
  • There are now more prefecture-backed loans, and financial institutions also offer products with unsecured and unguaranteed features, etc., leading to a wider range of selection. (Kanto and Chugoku)
  • The lending attitude relying on collateral or guarantee still appears to exist. (Hokkaido, Tokai, Kanto, Kinki, Shikoku, Kyushu and Okinawa)
  • Financial institutions still assume a lending attitude emphasizing a security backing and are scarcely inclined to make efforts towards lending in consideration of technological strengths, know-how and management resources. (Chugoku)
  • Although offerings of unsecured and unguaranteed loan products are increasingly broader, loan terms and assessment are still rigid. (Tohoku)
  • While many businesses wish to make use of an unsecured or no-guarantor loan program, they have difficulties due to the limited choice available. (Okinawa)
      C.  Comments made with respect to the actual status of management guidance and business startup or revival assistance
  • Efforts in the area of business startup and new business assistance have gotten underway in Hokkaido, including the scheduled launch in October of a joint initiative between industry, academia and public administration together with financial institutions. (Hokkaido)
  • Each financial institution is actively working on management and business startup or revival assistance, etc. for borrower companies, which shows that efforts in relationship banking are now bearing fruit. (Tohoku)
  • As a result of relationship banking efforts, financial institutions' mentality change and corporate service offerings appear to be improving; seen from the fact that, for instance, they provide business consulting and matching services. (Tokai)
  •  No positive attitude appears to exist in the area of management and business startup or revival assistance. (Fukuoka)
  • Seeing that regional banks and Second-Association regional banks now pay fewer visits to companies, they have only a poor system of providing assistance to small businesses. (Chugoku)
  • Awareness on the part of borrowers is naive; e.g., some of them blame poor business records on others. (Kinki)
      D.  Comments made with respect to attitude in providing explanation when lending
  • Financial institutions are trying to enhance their system of providing explanation and, on the whole, now do provide sufficient explanation to customers. (Hokkaido, Tohoku, Tokai, Kinki, Shikoku and Okinawa)
  • Financial institutions are committed to providing careful explanation and appear to be making efforts in enhancing their system of explanation. (Kyushu)
  • There are some cases where sufficient explanation is found not to have been given. (Tokai and Kinki)
  • The depth, etc. of explanation is different depending on who provides one, e.g., branch manager or service representative. (Shikoku and Fukuoka)
      E.  Comments made with respect to the actual status of quality and ability of financial institutions
  • Financial institutions are trying hard to improve their quality and ability and have made improvements from the past. (Hokkaido)
  • Some financial institutions now have a larger staff base with specialized knowledge. Financial institutions have also recently developed a ''better eye'' for making lending decisions. (Kyushu)
  • Service representatives lack, among other things, a ''good eye'' for making lending decisions as they rely too heavily on loans with a credit guarantee corporation's guarantee and have insufficient hands-on experience. (Kinki)
  • As the lending attitude changes when a different service representative is assigned as a result of, for example, the predecessor being transferred, it is requested that financial institutions take utmost care in the event of service representative takeover. (Chugoku)
  • Quality and ability vary substantially between sales representatives. (Chugoku)
  • Financial institutions lack the ability to determine and assess technological strengths, etc. of SMEs. Their training itself is also only of a makeshift nature and is void of organized and systematic programs. (Hokkaido)
  • Emphasis is placed on past records (financial statements) while no consideration is taken of the proprietor's quality and the company's future potential. (Kyushu)
      F.  Comments made with respect to period of loan assessment
  • Assessment periods are generally getting shortened, leading to quick loan decision-making. (Hokkaido, Okinawa and Shikoku)
  • Assessment periods are becoming increasingly shorter owing to offerings of products with immediate loan decision features and to computerized assessment systems. (Tohoku, Kanto and Kinki)
  • Cases that entail main office involvement or go through a branch without a dedicated assessment section tend to require more assessment time. (Hokkaido and Tohoku)
      G.  Comments made with respect to the actual status of interest rates
  • Complaints about a unilateral interest rate rise have not been heard recently. (Shikoku)
  • Interest rate determination by means of rating scales has resulted in higher interest rates. (Hokuriku)
  • According to the business conditions and state of financial affairs, the difference in interest rate between preferred borrowers and other borrowers is widening. (Hokkaido, Tohoku and Kyushu)
      H.  Other comments made
  • Regional SMEs and micro enterprises are reluctant to borrow because they are apprehensive about future repayments due to declining sales, aging of proprietors, and shortage of successors. (Hokkaido)
  • Capital demand of SMEs has continuously been on the decline. (Chugoku)
  • As stagnant regional economies, etc. have caused many companies to suffer poor business records, their capital demand stands out to be backward-looking, including requests for longer loan repayment terms and loan applications intended to pay arrears such as delinquent taxes. (Kanto)
 
(3)  Overview of interview results on ''Case examples showing the penetration of the measures for facilitating SME financing''
  • In the Small- and Medium-Sized Enterprise Financing Monitoring, a specific theme concerning inspection and supervision is set each time for the purpose of inquiring about cases showing the penetration of the measures for facilitating SME financing.
  • The following theme was set this time around:
 
Degree of awareness among SMEs, of the Supplementary Issue to the Financial Inspection Manual [for Small- and Medium-Sized Enterprise Financing] (revised version)
 
[Main comments received]
  • Although SMEs do know the existence of the Supplementary Issue to the Financial Inspection Manual, only a small number of SMEs know what is written there.
  • As steps have been taken to raise the awareness among management counselors through information sessions, etc., the Manual is increasingly, though slowly, becoming known to SMEs.
  • As SMEs do not feel as threatened now due to recent turns in financial institutions' lending attitude in a positive direction, the degree of awareness of the Supplementary Issue to the Financial Inspection Manual is weakening.
  • The fact that many technical terms are used in the leaflet makes it a difficult read for SMEs.
  • It would be more effective to place a full-page newspaper advertisement rather than issuing a large number of leaflets.
3.  How the ''SME Financing Monitoring'' Results Are Used
 
(1)  Conducting Interviews
Making use of the information on specific financial institutions that was obtained through the Small- and Medium-Sized Enterprise Financing Monitoring, we conducted interviews with them as to their action policies and relevant structures, etc.

(2)
 Making Requests at Discussion Meetings (Use by the FSA)
At discussion meetings (held every month) between top FSA officials and business association representatives and on other occasions, we have presented cases learnt through the Small- and Medium-Sized Enterprise Financing Monitoring. More specifically, we requested participants to, for example: further facilitate a supply of funds to sound SMEs, including loan arrangements focusing on cash flows from business activities and not rely excessively on collateral and guarantee; provide sufficient explanation, sufficient enough for the customer to be able to reach an understanding and satisfaction, that takes into consideration the past relationship with and the knowledge, experience and asset conditions of the customer; and work on making the Supplementary Issue to the Financial Inspection Manual further known.

(3)
 Presentation Opportunities at Conference for Regional Financing Facilitation (Use by Local Finance Bureaus, etc.)
On various occasions including the ''Conference for Regional Financing Facilitation,'' which has been established in each prefecture and is organized on a bi-annual basis (with its membership 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 from financial institutions, Local Finance Bureaus have raised the awareness of participants on the subject of developing customer-targeting explanation structures and strengthening consultation and complaint handling functions, and requested them to work on facilitating SME financing.
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