Bankruptcies raise fears that zero-zero loans will not be repaid

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A recent increase in bankruptcies caused by the prolonged COVID-19 pandemic has raised concerns about widespread defaults on government-backed “zero-zero loans” issued to help businesses through the health crisis.

The now-completed loan program began in March 2020 and about 42 trillion yen ($288 billion) had been issued through about 2.34 million loans by the end of June, according to the Small and Medium Enterprises Agency. businesses.

Repayments are due to begin next spring.

Under the program, financial institutions provided zero-zero collateral-free loans to small and medium-sized businesses whose sales declined during the pandemic.

The central and prefectural governments cover interest on loans for three years and public institutions act as guarantors if companies do not repay.

Private financial institutions stopped receiving loan applications in March last year.

Government-affiliated financial institutions ended their participation in the program at the end of September this year.

The government has budgeted about 1.8 trillion yen to be paid out as interest to financial institutions, and about 400 billion yen of that was disbursed by the end of March.

The financial support has helped keep the number of bankruptcies in Japan extremely low.

The research company Teikoku Databank Ltd. said the number of business bankruptcies with debts of 10 million yen or more in fiscal 2021 fell below 6,000 for the first time in about half a century.

The bankruptcies figure, however, has risen since the spring of this year as rising fuel, material and product prices and a weak yen have hit businesses harder.

In August, 493 businesses went bankrupt, 44 more than in the same month last year. This is the fourth consecutive month of year-over-year increases.

Of the companies that took out zero-zero loans, 253 went bankrupt from January to August, or 1.5 times the 166 bankruptcies in all of 2021.

When zero-zero loans provided by private financial institutions go bad, credit guarantee companies, which are public institutions, pick up the repayments.

According to loan guarantee institutions, they covered 26.6 billion yen of loans, including zero-zero loans, in August, up 26 percent from the same month last year. It was the 12th month in a row that the figure rose year-on-year.

If the guarantee institutions are unable to recover the money, part of the loss will be covered by public funds.

(This article was written by Ryuhei Tsutsui and Takumi Wakai.)

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