Regional banks in Japan are increasing unsecured retail lending of late, offering huge potential for fat margins for regional banks. Considering high profit margins from unsecured loans, banks take risk of lending without collateral security.
With Japanese central bank squashing low interest rates into negative mode, regional banks find growth potential in lending to automobile and holiday spending requirements. Unsecured loans generally ranging up to Yen one million cash covering shopping, vacation spending and holiday travelling.
Japan Today reports that unsecured loans command interest rate of about 15 percent for regional banks. This is much higher than mortgages or small firm borrowings. Automobile loans including cars are also getting good revenue for banks. Regional banks in Japan find unsecured loans are very attractive amid ultra-low interest rate regime in the country.
Encouraged by high profit margins, Japanese regional banks are willingly taking risk of unsecured lending without any collateral security. Otherwise, making a domestic yield in an over-banked in low interest regime is much difficult exercise for regional banks. Japan's banking sector is suffering from fall in other loans including business and mortgage.
Latest monthly data from Bank of Japan (BoJ) reveals 2.2 percent growth in outstanding bank loans for February 2016 as against 2.3 percent gain in January. The recent peak of lending growth was 2.8 percent in August 2015. Regional banks outperformed major banks in lending. The lending by regional banks rose 3.4 percent in February from 3.5 percent in January. Indicating 39th consecutive monthly rise, outstanding loans by major banks gained one percent on year-on-year basis in January, according to MNI, Deutsche Borse Group.
Bank of Yokohama Ltd, Japan's second largest regional bank by assets, sees 39 percent surge in its unsecured retail loans portfolio on year-on-year basis. The bank's unsecured retail loans portfolio rose to Yen 59.4 billion for the first half ending September 2015. If present growth rate continues, then the Bank of Yokohama will reach its target of Yen 70billion for the year ending March 2016, as reported by Japan Today.
Meanwhile, the Bank of Japan is struggling to find positive factors in negative interest rate regime. Prime Minister Shinzo Abe is also very cautiously responding to economic issues. Some economists see difference of opinions among Haruhiko Kuroda, Governor, Bank of Japan, and President Shinzo Abe, over the economy reforms and interest rates. Abe has recently announced setting up a panel for providing fresh stimulus to ailing economy. Prices are flat in shrinking Japanese economy, as reported by Reuters.
While making a comparison of unsecured loans with mortgage lending, some bankers estimate the profitability from Yen 100 billion lending of unsecured lending is as equal to Yen 1 trillion lending in mortgages. However, some banks don't feel comfortable with unsecured loans as it gives an image of loan shark.
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