Japanese Banks Encouraged to Reconsider Their Lending Policies

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Buildings are reflected on a Bank of Japan board in Tokyo December 30, 2008. Japan's government and central bank are considering a $110 billion scheme to buy bad loans and other financial assets from banks to ease a credit crunch gripping the country's businesses, daily Sankei Shimbun said on Tuesday. REUTERS/Issei Kato (JAPAN)

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Like in other countries, banks in Japan lend money to people or businesses for capital. However, it seems that many of these are more focused on seeing businesses for what they are now rather that what these could become in the future – at least this is what was observed by the country’s financial regulator as seen in its draft guidelines that reviews overall performance, which will later be published this week. Based on the results, the regulator will be creating a recommendation on where to focus efforts for the next year. For now, this is urging banks to reconsider their lending rules and regulations.

While Japan is considered the third largest economy in the world, this has not been gaining momentum lately, the reason why banks are now being pushed to reassess their current lending rules. The government is hoping that the change will boost the economy significantly and offset the country’s weak export industry, household spending, and factory production.

It has been observed that banks prefer to lend money to companies and institutions that have the ability to put out some sort of capital as a collateral – these are often those that have already made a name for themselves in the industry. Startups on the other hand are often left to their own devices. The FSA fears that this type of rule is not contributing greatly to the growth of the economy, but doing its opposite instead. The organization urges banks to see the borrowing companies for how these could later on grow in the future. They also say that banks are not investing in startups with high potential growth because of their stringent regulations. The FSA criticized lending policies because creditworthiness is often based on collateral instead of possible growth potential. FSA is now trying to explain to banks that they should also try to look at the sustainability of the new business model instead of just relying on past financial performance when evaluating candidates.