Banks will be tested on their ability to appraise nontraditional companies

Editorial

12:25 JST, June 26, 2022

The current system in which companies without real estate have difficulty obtaining loans from banks does not fit with contemporary times.

A mechanism that allows companies with superior technological and other capabilities, but without tangible assets, to smoothly obtain funds must be established.

The government intends to create a system that allows companies to obtain loans not only using as collateral their tangible assets such as land, buildings and equipment, but also using the entirety of their business, including intangible assets such as patents, customer bases and brands. The Financial Services Agency and the Justice Ministry will consider such measures in enacting new legislation.

The Civil Code currently defines only tangible assets as collateral and does not specify that the entire business including intangible assets can be used as such. The new law is intended to specify the rules for loans using the entire business as collateral and encourage this use.

Changes in the economic structure have shifted the mainstream of Japanese industry from manufacturing, which has many facilities, to non-manufacturing. More recently, with the growth of the information technology industry, intangible assets such as intellectual property and data have become sources of corporate competitiveness.

It is only natural that the changing times will require financial institutions to rethink their ways to provide loans.

If the entire business can be used as collateral, it will make it easier for startups, which often remain in the red despite their technological capabilities and research and development achievements, to get loans.

This is expected to provide a boost to, for example, fintech companies, which engage in business that combines finance and IT, and startups engaged in creating new pharmaceuticals.

It will also make it easier to support small and midsize companies, such as inns and supermarkets that have close connections to the local community, and have strengths in local name recognition and relationships of trust with their customers, but whose business has deteriorated due to the COVID-19 pandemic.

However, there are a mountain of issues to be addressed in order to make the new system work.

In order to limit the risk of losses from bad debts, Japanese financial institutions have relied on loans with real estate as collateral, which has a clear value and is easy to recover. As a result, it has been argued that they have not honed their appraisal ability to judge the growth potential of a business and provide loans.

It is not easy to improve this expertise and assess the value of the business as a whole. It will be essential for financial institutions to change their way of thinking and develop human resources.

There is also concern that, in the new system, financial institutions will force loan recipients to sell their entire business in order for the institutions to exercise their security interests when loan recipients fall into financial difficulties.

A framework to prevent financial institutions from abusing their dominant position and the FSA’s supervisory system must be strengthened.

The government must carefully identify issues in designing the new system and proceed with the development of highly effective legislation.

(From The Yomiuri Shimbun, June 26, 2022)