The six-year decline in lending by Japanese banks is finally slowing down thanks to the economic recovery, signalling a possible pickup in financing, above all for small and medium-sized enterprises, experts say.
Japanese banks' outstan-ding loans decreased for the 77th consecutive month in May, down 4.1 percent from a year earlier, according to Bank of Japan data released last week.
However, the rate of decline slowed compared to the two previous months, when lending contracted 4.6 percent and 4.8 percent respectively.
When adjusted to take account of non-performing loan disposals or the securitization of debt, lending only decreased by 1.3 percent, the smallest contraction in five years.
The figures "show that corporate demand for new finance is gradually changing thanks to the prolonged economic recovery and that financial institutions are also changing their lending stance thanks to the pro-gress in balance sheet re-structuring," said Masaaki Kanno, chief economist at JP Morgan in Tokyo.
Japan is in the third year of a cyclical recovery in which economic growth in the January to March period achieved an annualized rate of 6.1 percent, the best performance among the Group of Seven most industrialized nations.
The annual results of major banks for the year to March also showed an overall improvement thanks to lower bad-debt charges and the improved economic climate.
The banks have been responding to pressure from the government to halve their bad debts overhang from March 2002 levels by March 2005.
"They wrote off so many bad loans, so considering that, I think the current reduction pace is not so bad," said Naoko Nemoto, Japanese banking sector analyst for rating agency Standard and Poor's.
That means the banks could now be in a position to move up a gear in their recovery by strengthening their revenue base through the development and diversification of their lending, analysts say.
"It is positive for the banks. For the economy it is positive to have loan growth because companies procure capital to grow and if companies grow the economy will grow," said Ned Akov, banking sector analyst for ING Financial Markets in Tokyo.
Total outstanding loans could start increasing again from as early as March next year, he added.
While the big companies often have sufficient cash reserves or are turning to the stock market to raise funds, demand for bank loans is still strong, Akov said.
It is the small and medium-sized companies, battered and bruised by years of economic slump, that would be the main beneficiaries of an upturn in lending.
Already, "some banks are quite aggressive in this," said Akov, who does not subscribe to the commonly expounded view that there are too many Japanese banks chasing too few borrowers.
"Today there is some healthy demand from growing sectors" for bank loans, Nemoto said.
Banks have also been trying to increase their profits by moving into the lucrative consumer credit market, which, with the exception of housing loans, was once thought beneath the dignity of the major lenders.
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