Interest-Free, Unsecured Loans: Help Businesses Achieve Steady Post-Pandemic Recovery

An increasing number of small and midsize companies have started repaying virtually interest-free and unsecured loans extended by the government as part of countermeasures implemented amid the COVID-19 pandemic.

Concerns have been voiced over a possible uptick in corporate bankruptcies due to an inability to repay the loans. In this regard, financial institutions should strive to provide recipients with tailored support.

During the pandemic, many companies — especially in the tourism and restaurant sectors — encountered serious difficulties due to a sharp fall in patronage. In March 2020, the government began providing essentially interest-free, unsecured loans to help small and midsize companies stay afloat amid a drop in sales.

Under the government program, prefectural governments cover the interest on loans for three years, and principal repayments are deferred for up to five years.

Initially, such loans were handled solely by government-affiliated financial institutions, but from May 2020, the loans also became available through private financial institutions. Applications for the loans closed in September last year, with around 2.5 million applications logged and total disbursements of about ¥43 trillion.

The loans ensured that corporate bankruptcies were kept to a level well below pre-pandemic figures. It can be said that the unusually generous measure aimed at supporting crisis-hit companies had great significance.

Conversely, there can be no denying that the loan program has stalled moves to resolve certain problems. Unlike relief benefits, the loans must be repaid. Repayments kicked in en masse at the beginning of the year, because many companies set the period for repayments to start after a period of three years, when prefectural governments stopped being obliged to shoulder interest payments.

Corporate bankruptcies are on the rise. According to a private credit research firm, bankruptcies of firms that received COVID-19 relief loans exceeded 300 in the first half of 2023 — up 80% on the previous year — with the restaurant industry topping the list.

Eateries have yet to experience a return to pre-pandemic business levels, and have seen fewer requests for banquets and other events. Dining establishments have also been plagued by rising costs for fuel and other items. Despite the increase in foreign visitors to Japan, the tourism industry has yet to fully recover. There also has been a conspicuous number of cases in which businesses have halted restructuring plans and fallen into bankruptcy before repaying their relief loans.

The restaurant and tourism industries have helped buoy employment in regional areas. A sharp increase in bankruptcies must be avoided.

The loan program operates a system in which local guarantor associations shoulder the financial burden if a recipient becomes unable to repay. However, taxpayers’ money is diverted into such associations, meaning public funds are utilized when loans go bad.

Financial institutions have been criticized over the loose provision of loans under the program, because they deemed such advances did not pose a threat to their businesses.

Financial institutions have a responsibility to back the steady rehabilitation of the companies they finance, thus ensuring loan repayments proceed smoothly. It is hoped that financial bodies will extend customized support to such firms, including offering assistance with the creation of new businesses and the expansion of sales channels, while monitoring issues related to business continuity.

(From The Yomiuri Shimbun, Sept. 16, 2023)