News Archive : Japan Real Estate

Thursday, November 24, 2005

Banks Improving Risk Control Of Real Estate Loans On FSA Warning

November 22, 2005
Banks Improving Risk Control Of Real Estate Loans On FSA Warning

TOKYO (Nikkei)--Banks are moving to strengthen risk control measures to cover their growing lending for real estate projects, as the Financial Services Agency has begun sounding the alarm about such loans.

Bank loans used for real estate transactions, especially investment projects by real estate investment funds, are ballooning. Sumitomo Trust & Banking Co. estimates, based on real estate securitization data, that of about 20 trillion yen worth of property transactions conducted nationwide, 10-12 trillion yen worth of deals are covered by bank lending.

The trend reflects the banks' increasing willingness to extend loans for real estate projects, given the stagnation in lending to large companies.

Most of the loans are nonrecourse loans for which banks cannot demand repayments beyond the value of a borrower's assets if the borrower goes under.

The top six bank groups had 4.2 trillion yen in the outstanding balance of real estate-related loans at the end of March this year. The Mizuho Financial Group and Chuo Mitsui Trust and Banking Co. saw about 1 trillion yen each. Even among regional banks, some had more than 100 billion yen in the balance of such loans.

Meanwhile, the spread between lending rates and fund-raising costs are narrowing on increasingly stiffer competition among banks, falling to below 0.5% compared with about 2% four years earlier.

Amid these circumstances, the FSA is stepping up its surveillance on banks out of a concern that they are taking unreasonably high risks amid the cutthroat competition.

In response, banks are also taking their own risk control measures, such as shortening lending terms and including in loan contracts provisions allowing them to call on borrowers to raise the rents of properties in which they have invested.

(The Nikkei Financial Daily Tuesday edition)