^* This is the English translation of the article appeared in Nikkei Business, No. 1170 (December 19, 2002).

January 2003
Atsushi Miyauchi

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Introduction

Japan's non-performing loan (NPL) problem was, previously, regarded as stemming from the formation and bursting of asset price bubbles. In recent years, however, the problem has been increasingly linked with structural adjustment pressure in the economy. This article analyzes the continuing large amount of NPLs at Japanese banks against the background of structural adjustment from the viewpoint of their lending model, i.e. lending rules and practices. The article also discusses the need for a new lending model, which urges earlier corporate restructuring or liquidation, especially when structural changes can weed out non-competitive firms. In order to promote this scenario, new provisioning rules reflecting the decrease in economic value/benefits of NPLs are desirable.

Contents I. Introduction
II. NPL Problem and the Profitability of Loan Assets
III. Economic Value of NPLs and Their Profitability
IV. Current Provisioning Rules and Defects
V. New Trends in Loan-Loss Provisioning
VI. Building an Infrastructure for the New Lending Model

(Chart1) Interest Rates on Bank Loans
(Chart2) Additional Loss to be Realized in Business Reconstruction or Loan Sales
(Chart3) Gross Margin and Credit Cost Ratio on Bank Loans