Editorial: Banks should factor in future growth for small-business financing

September 23 , 2020

Given that companies are fighting for solvency during the pandemic, further assistance to smaller business operators must come quickly. The Financial Services Agency (FSA) recently urged private financial institutions to take into account corporate borrowers’ prospects of future growth when considering them for loans.

Generally, private lenders seek material collateral—the property owned by the prospective borrower or the business owner’s personal assets, for example—for obvious reasons. But companies in Japan defaulting on loans that are forced to relinquish their collateral are almost never revivable, and that can undermine the very foundations of a local economy if it occurs in large numbers.

Such forward-looking funding is already taking root. One such initiative is investment based on Environment, Social and Corporate Governance (ESG) factors, and the onus is on financiers to develop a scheme to properly evaluate them when extending loans.

The new FSA guideline should also help smaller banks and other financial firms servicing local business communities by incentivizing them to look for a new, sustainable market as traditional profit centers dry up. These lenders have been struggling for some time—the agency reports that some 70% have suffered declining profitability in the ongoing era of ultra-low interest rates—and more than a few are on the brink of collapse.

The FSA plans to lay the groundwork through various policy initiatives to expedite the transition of financiers to ESG and other non-traditional risk assessment programs for small- and medium-tier enterprises (SMEs).

But time is of the essence. SMEs today comprise 99.7% of all companies in Japan while hiring some 70% of the total workforce, and a significant majority has been badly hurt by the pandemic. Their operating health is central to achieving a post-pandemic economic recovery.