The Competition and the Efficiency in Japanese Consumer Credit Market(in Japanese)

1. Perspective The number of personal bankruptcy has been increasing recently in Japan. The burden of defaulted credits to Consumer Finance Companies (so called "sala-kin" in Japan) has been increasing accordingly. On the background of this trend, we can detect the following three peculiarities in Japanese Consumer Credit Market, 1) The stock of the whole consumer credit decreased from at its peak 75thousand billion yen in 1996 to 65thousand billion yen in 2000, which is nearly equal to the level of 1990. 2) The stock of the non-bank consumer credit i.e. the consumer credit supplied by Consumer Finance Company and Shopping Credit Company, increased from 1990 to 1996 by 4.8% annually. Then it suddenly slowed down its growth rate and increased by only 1.0% annually from 1996 to 2000. However the number of personal bankruptcy mainly caused by the non-bank consumer credit continues to increase rapidly. These facts indicate the enlargement of the share of high-risk loans in the non-bank consumer credit. 3) In spite of the high interest rate, the stock of the consumer credit supplied by Consumer Finance Companies continues to increase rapidly in 1996 to 2000, i.e. by 10% annually. These three peculiarities indicate the possibility that the harsh competition in Consumer Finance Market has induced the deterioration of the quality of the consumer credit supplied by Consumer Finance Companies. 2. Analyses The competition is said to improve the efficiency of markets. However in the credit market, which is characterized by asymmetry of information, if it is not well equipped with institutionalized incentives and conditions to control the risk of credits, the competition often results in creating the voluminous high-risk loans. In this regard, we have a very impressive multi-debt borrower problem, so called "taju-saimusya mondai" in Japanese, who continues to increase his debt endlessly, even when he is surely unable to reimburse his debts, to go bankrupt. A serious multi-debt borrower problem occurs in the market, where the multi-debt borrower, who has already large debt and small possibility to be able to repay, can easily find new creditors, because he has to have new credits to reimburse the old ones. In this market, a loan to the high-risk borrower would not go bankrupt easily, as he could take new credits when he happen to be unable to repay the debt. The loans to the high-risk borrowers are apt to disturb the risk evaluation in the market and the harsh competition would result in increasing voluminous risky loans. In this paper, while focusing on the multi-debt borrower problem as a typical anomaly in the financial market, I explore the mechanism of the multi-debt borrower problem, its causal relation with law and institutions and how it affects the efficiency and the stability of Japanese Consumer Credit Market dynamically. Then I study the concrete measures to improve the performance of Japanese Consumer Credit Market. 3. Results (1) As the debtor and the creditor share the cost of defaulted credits according to the procedure defined by bankrupt laws and the burden of the defaulted debtor is bounded, this happens to cause moral-hazard, i.e. when the debt becomes too large, the debtor continues to increase his debt endlessly without considerations about the possibility to reimburse his debt. (2) As the high transaction cost and the serious uncertainty of the legal bankrupt procedure interrupt the defaulted debtor to go bankrupt and there is not yet a system of Credit Bureau, where every creditor can acquire the personal credit history of every debtor, in Japan, the debtor's ordinary inclination to borrow too much could not be suppressed effectively and the creditor, who will lend without any considerations about the debtor's reimbursement capability, will emerge and he will cause the serious multi-debtor problem in Consumer Finance Market. (3) On certain conditions, Noise-Lenders, who will lend without any considerations about the debtor`s reimbursement capability, expand to influence the whole market. The loans of Noise-Lenders disturb the risk evaluation in Consumer Finance Market and cause the adverse selection, i.e. the harsh competition in the market expands loans to the high-risk debtors. (4) The adverse selection increases the burden of defaulted credits in the long run to wipe out the conditions for the existence of Noise-Lenders at a stretch. The potentially defaulted debts, veneered to be healthy debts by Noise-Lenders, shall abruptly go bankrupt and Japanese Consumer Credit Market will experience a serious disorder. As the loans to reimburse the old debts could only postpone the timing of default and do not improve the welfare of the debtor, Consumer Finance Market is an inefficient market to increase such kind of socially wasteful loans. (5) The current maximum interest rate regulation, which prohibits the interest rate higher than 30%, injures the efficiency of the market and is little help for the effective risk control in the market. We should improve the bankrupt laws and procedure and built a system of Credit Bureau as soon as possible.