An internal audit at the government-linked Shoko Chukin Bank has discovered document falsification at almost all of its branches regarding low-interest credit extended to crisis-hit companies that did not meet loan eligibility criteria.
Shoko Chukin is set to let go large numbers of its executives, and it appears President Kenyu Adachi, who was formerly a vice minister at the Ministry of Economy, Trade and Industry (METI), has no choice but to resign.
METI and other government bodies responsible for the low-interest program are considering ending the part of the scheme aimed at battling deflation, but which resulted in many shady loans. The program was intended for small- to mid-sized companies that were struggling temporarily due to crises designated as such by the Japanese government, like the 2008 financial crisis and the March 2011 Great East Japan Earthquake, tsunami and nuclear crisis.
Thus far it has been revealed that many of the illicit loans were extended on the pretense of dealing with deflation and the rising costs of raw materials and energy, which were designated as a "crisis" by the government in February 2014. Of the approximately 220,000 "crisis" loans issued by Shoko Chukin, some 59,000 cases amounting to around 28 billion yen were for deflation-responses loans.
According to a source close to the case, Shoko Chukin used the program's ambiguous definition of "deflation" to its advantage, extending low-interest loans to companies that were not truly in crisis. METI and other government agencies suspect that an interpretation of "deflation" beyond its original scope was widely used within Shoko Chukin to pad its loan performance. As soon as a general picture of the shady dealings become clear, government ministries and agencies will deliberate fundamental operational reform measures.
An investigation conducted by a third-party panel in April of this year on loans meant for handling crisis situations found that 816 cases involving the falsification of documents and other unauthorized activity had taken place at 35 Shoko Chukin branches nationwide, totaling some 19.8 billion yen. However, as that probe looked into only 28,000 loans, or 10 percent of the accounts at the bank's head office and 91 branches, Shoko Chukin is now investigating the remaining accounts at its various offices. The Financial Services Agency (FSA) has been carrying out on-site inspections since May, and has been exposing the organizational structure of the bank that spawned the unauthorized activity.
Of all the loans made by Shoko Chukin, some 30 percent were for handling crisis situations. METI, the Ministry of Finance and the FSA are waiting for the bank's internal probe to be completed, which could be as early as late October, before deciding on what additional administrative punishments to issue against the bank.
Furthermore, the government bodies will set up an expert panel as early as November to confirm the role of government-related financial institutions, and begin discussing a review of Shoko Chukin's operations, including the bank's reinforcement of corporate revitalization measures in a way that does not compete with private banks.