Thorough support needed to prevent surge in bankruptcies

Small and midsize companies have been accumulating debt amid the novel coronavirus pandemic. Concerns have been raised that repayments will become a burden in the future. The government and the financial sector must make an effort to thoroughly support small and midsize businesses.

The government launched a virtually interest-free, unsecured loan program in March 2020 as a measure for small and midsize companies that had fallen on hard times due to the pandemic. The program enabled such companies to secure loans from private financial institutions, in addition to government-affiliated financial institutions.

Loans from private financial institutions under the program were stopped in March 2021. Due to the prolonged COVID-19 pandemic and other factors, the deadline for applications with government-affiliated financial institutions was extended until the end of September this year. By the end of last year, loans and other financial assistance to small and midsize companies from public and private sector institutions were said to total approximately ¥55 trillion.

In 2021, there were approximately 6,000 corporate bankruptcies nationwide, the fewest in 57 years. It can be said that the virtually interest-free, unsecured loans had a certain effect.

However, many companies will start repayments this year. The maximum deferment period for repayments is five years, but the longer the deferment period, the heavier the burden becomes, so many companies have set deferments at one to two years.

According to a private credit research firm, about 30% of small and midsize companies think their debt is excessive.

Earnings have been conspicuously slow to recover in the restaurant and tourism industries, among other sectors. Small and midsize companies are also vulnerable to the effects of soaring fuel and raw material prices. There is a fear that many firms will be unable to bear the burden of repayment in the future.

Small and midsize companies account for 70% of overall employment, and firms in the restaurant and tourism industries often provide jobs in regional areas. A sharp increase in bankruptcies would deal a blow to employment and consumption.

Financial institutions should support small and midsize companies with flexible measures while examining the possibility of business continuity.

It would be undesirable for companies to immediately launch legal procedures for liquidation if they fall into difficulty with loan repayments. An effective method would be for companies and financial institutions to discuss repayment deferments, debt reduction or debt exemption, and work toward business revitalization.

The Japanese Bankers Association compiled guidelines for this purpose in March.

The guidelines state that a third party, such as a lawyer, should be consulted to ensure that the financial institution’s circumstances are not prioritized. Although managers of large companies are often required to step down in debt-related cases, according to the guidelines, the same should not necessarily be true of small and midsize companies.

The loan recipient’s situation must be taken into consideration and efforts to steadily revitalize the company must be devised. A wide range of support is desirable, including not only the postponement or reduction of repayments, but also encouraging the creation of new businesses or changes in business format.

(From The Yomiuri Shimbun, May 7, 2022)