Japan to end COVID-era bank guidelines for struggling borrowers, Nikkei reports

Japan’s financial regulator would instruct lenders next year to place a greater focus on turnarounds for struggling borrowers, a departure from the cash flow support offered during the COVID-19 crisis, according to “Nikkei.”

Borrowers will be directed into dramatic restructuring rather than allowing debt issues to deepen by postponing payments under amended Financial Services Agency rules set to be released next spring.

The action by the FSA comes after Japan’s economy has recovered from the ravages of the epidemic, which impacted small companies especially hard as customers stayed at home.

According to proposed recommendations, financial institutions will be advised that assistance for business improvement should go beyond only sustaining cash flow and that it “must be carried out as soon as possible.”

In addition, the FSA will request that the Japanese Bankers Association change its recommendations on out-of-court debt workouts for small and medium-sized enterprises. When lenders detect early indicators of financial difficulties, the modifications will allow firms to be guided toward rehabilitation.

When the pandemic began in April 2020, the FSA urged financial institutions to do everything possible to help borrowers maintain their cash flow. Lenders let firms postpone payments on existing loans while also providing new, de facto zero-interest, zero-collateral borrowing.

The FSA sees extending easy repayment terms as a barrier to company turnarounds, as rollovers of these “zero-zero” loans will be mainly over by next April.

Many financial institutions considered loans to firms that went bankrupt during the epidemic as performing loans and did not make adequate arrangements for defaults.

Much will depend on regional financial institutions’ willingness to adopt extreme steps that will result in some losses.

The FSA’s decision to withdraw cash flow support from the private sector parallels the government’s approach to COVID-19. COVID-19 was lowered to category 5 on the government’s infectious illness scale in May, the same as seasonal influenza.