Forcing high risk on entrepreneurs negatively impacts business culture

“Management guarantees,” meaning arrangements that require owners of small or medium-sized companies to personally repay loans from financial institutions if the companies are unable to do so, have been identified as a hindrance to entrepreneurship and business succession.

The government and financial institutions are urged to work to remedy the problem.

Management guarantees are a long-standing business practice meant to reduce financial institutions’ risk of loan defaults.

When unable to repay a loan, owners are forced to sell their homes and vehicles, among other assets. In the worst case, they are driven into bankruptcy.

Although financial institutions argue that one of their aims is to maintain discipline, there is no doubt that the practice has become a psychological burden for owners of small and medium-sized businesses.

According to a survey, when people who were interested in starting a business were asked what their concerns were, many cited being required to bear the burden of a personal guarantee in the event of business failure.

In an effort to improve the situation, the Financial Services Agency has released draft supervisory guidelines that encourage financial institutions to avoid the use of management guarantees as much as possible. The agency said it plans to apply the guidelines from April 2023.

According to the draft guidelines, when a financial institution requires a management guarantee, it would be required to explain in detail to the loan recipient why it is necessary. The draft also requires that the details of such guarantees be recorded and that the number of guarantees be reported to the agency.

The draft guidelines also request that efforts of financial institutions to provide loans without relying on management guarantees be made public. The agency said it will take administrative action if there are any violations in the procedures. The agency should ensure that financial institutions are aware of the purpose of the guidelines.

In 2013, the Japanese Bankers Association and other organizations compiled their own guidelines clarifying the conditions for management guarantees. Based on this, the agency requested financial institutions not to excessively rely on such covenants.

However, even at present, only about 30% of new private-sector loans do not carry a management guarantee.

In a survey conducted by the agency, more than 70% of financial institutions said they always explain the bankers association guidelines to their debtors when asking for a guarantee. However, according to another survey conducted by the Economy, Trade and Industry Ministry, only about 30% of small or medium-sized companies said that they had received such explanations.

The attitude of the financial institutions is questionable. Their primary role should be to evaluate the growth potential and profitability of the loan recipient and provide the necessary funds. It is important to hone know-how and develop human resources so that loans can be made based on the ability to properly evaluate such criteria.

In addition, financial institutions should not become overly reluctant to provide loans as a result of using management guarantees less often.

(From The Yomiuri Shimbun, Nov. 29, 2022)