Japan’s Financial Services Agency plans to examine the credit risk management practices of regional financial institutions following the bankruptcy of payment-processing company Zentoshin.
Osaka-based Zentoshin reportedly owes ¥115.1 billion to 63 financial institutions, according to credit research firm Tokyo Shoko Research. The scale of the exposure has raised concerns about lending standards and concentration risks among regional lenders.
Major financial institutions had reduced their exposure to Zentoshin, but several regional banks, shinkin banks and credit unions continued providing loans to the company. Following its failure, many of these institutions have been required to create loan-loss reserves.
A key concern is that several lenders had not adequately secured their claims through collateral. The case has therefore highlighted weaknesses in borrower assessment, ongoing credit monitoring and the management of large or concentrated exposures.
Kinkisangyo Shinkumi Bank, Zentoshin’s largest creditor, said its lending should be viewed as indirect financial support for small and medium-sized restaurants rather than excessive credit provided to a single company.
However, the explanation has not removed concerns about whether regional financial institutions properly evaluated the underlying risks. Industry observers have questioned why lenders continued extending credit despite signs that larger institutions were reducing their exposure.
The FSA’s examination is expected to focus on lending decisions, collateral management, borrower monitoring and the adequacy of internal credit risk controls. The case may also lead regional institutions to strengthen governance and improve oversight of major borrower exposures.
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