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Consumer lending in Japan – susceptibility to macro events and foray into new markets

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In 2014, retail lending in Japan grew by 1% y-o-y. This is in sharp contrast to the nearly 8% growth in 2013 when Auto loans and card loans showed very strong performances. While credit cards has witnessed a strong market in Japan for quite some time now, the growth in auto loans can be attributed to the proposed VAT increase from 5% to 8%, which led consumers to make big-ticket purchases immediately in order to save tax.

A key take away point here is, much of the growth in 2013 was more due to the significant macro-economic events than improvements in the market conditions. The traditional issue in consumer lending in Japan is still prevalent i.e. financial institutions have significant deposits but very few lending opportunities. The low demand ensured that the rate of interest remained at a dismal 1.2% in 2014.

Apart from the unfavourable demographics, the consumer credit industry in Japan is heavily influenced by regulations and structural changes. Most regional banks suffer from a trio of familiar and entrenched woes—extreme risk aversion, growing competition and shrinking markets, as young people move from small towns to big cities such as Tokyo, Nagoya and Osaka. Like Japan’s “megabanks” the regional banks mainly focus on lending to corporates, despite razor-thin margins. Big banks have the option of falling back on their more profitable foreign operations, but regional banks are usually purely domestic.


For a long time now, Regional banks, have generated profit by investing in Japanese Government Bonds (JGBs) instead of retail lending. The monetary easing by Bank of Japan (BoJ) has made this option increasingly unprofitable. Since JGBs became expensive, Regional Banks have started falling back to profitable lending as the main source of revenue.


With the competition within Japan already very high (HHI index of nearly 3000), the Regional Banks segment looks set for consolidation. Bank of Yokohama, and Higashi-Nippon Bank, a regional lender based in Tokyo, have agreed to integrate their operations under a joint holding company in April 2016. Regional Banks have also started investing increasingly in foreign markets. Gunma Bank, for example, aims to increase the balance of its overseas loans by 50 percent, to $506 million, in this fiscal year.


Lending specialist companies have had it tough ever since the Money Lending Business Act came into picture in 2010. The act lowered the limit on cash advance services from 29.2% to 15-20% and the cap on total lending at one third of a borrower’s annual income, which has resulted in cash advance services to become considerably less profitable for lending specialists. Since the act only applies to specialist companies, banks and credit associations have increased its presence in cash advance products.


While the increase in demand for credit cards is a boon, given the decrease in margins and increase in competition, operational efficiency and market expansion should be at the forefront for these companies. Companies like Acom, SMBC Consumer Finance, and Aiful, which already have a presence in overseas markets, turned profitable in FY2013 after many years of struggle. Idemitsu Credit has started operations in South-East Asia, in search of profitable markets. Moreover, lending specialists were crippled by the passing of just one Act. This suggests that it is necessary for these Lending specialist companies to widen their product range so that they reduce the business impact of such changes in the future.


Meanwhile, the big 3 – City Banks of Japan, Sumitomo Mitsui Banking Corporation (SMBC), Bank of Tokyo-Mitsubishi UFJ (BTMU), and Mizuho Bank, are already involved in overseas operations. With a significant global presence and deep pockets, these banks are much more aggressive in their market expansion.

South-East Asia is currently the hottest region for Japanese banks. BTMU invested $100 million to become the first foreign lender in decades to open a branch in Myanmar in April 2015. SMBC opened its first branch just days after BTMU’s launch and Mizuho Bank is a part of the six foreign banks that have applied for banking licenses in the country. The holding companies of these major banks already control major banks in the region. Bank of Ayudhya, a $50 billion lender from Thailand, is controlled by the Mitsubishi UFJ Financial Group (MUFG).

It is fairly evident that Japanese financial institutions have embarked on a search for profitable markets in order to survive. South-East Asia is the current destination of choice. While mega banks already have the experience in venturing into foreign territories, it is the Regional Banks and Lending Specialists that will need all the regional expertise that they can get. Low margins, need for aggressive expansion and the Japanese policy of keeping a centralized control on subsidiaries mean that these companies will need to invest in technology as well. A lending technology provider with considerable experience in the South-East Asian market will be a boon for them.

What do you think?


Nucleus Software’s FinnOne lending suite supports all types of lending, and is used by banks and finance companies around the world for their loans portfolios. Find out more about our productsservices and Industry solutions.

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About the Author

Arup Das, Vice President and Lending Product Head (P&L Management)

Mr. Arup Das is the Vice President and Lending Product Head (P&L Management) at Nucleus Software where he is responsible for taking the flagship product to the next level of global leadership. Before joining Nucleus, he held a variety of roles in strategy and product management with leading companies including CISCO, IPValue and Mphasis.


David Turner- August 13, 2015

Nice post, Arup. The SE Asia market certainly continues to be a lively market for finance companies seeking better returns. I'm just in the Philippines today, where we're hosting a session with the finance community entitled 'Shaping the Future of Finance'. Lots of interest from local and international banks keen to learn how technology can help them compete and capture a larger share of this competitive market.


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At Nucleus Software we are committed to providing efficient, modern yet proven software solutions for the global Banking and Financial Service industry. We have been pioneers in developing Retail Banking Software, Corporate Banking Solutions, Transaction Banking, Cash Management and Internet Banking Software since 1986. Our success spreads across more than 50 countries, and we serve our customers globally through our direct and partner operations across US, Europe, Asia-Pacific, Africa and the Middle East. We are known for our world-class expertise and innovation in lending and transaction banking technology. Our two flagship products, built on the latest technology are: FinnOne™ and FinnAxia™.