Japan’s Suruga Bank Under Fire for Potentially Illegal Loans

Draft report by investigative panel says the bank’s management failed to take reasonable caution against lending malpractice involving the falsification of documents.

An independent investigative panel has found that Japan’s Suruga Bank handed out inappropriate loans worth over JPY 1 trillion (USD 9 billion), reported Nikkei Asian Review.

The FSA (Financial Services Agency) launched an investigation into Suruga Bank in April, seeking to find out if senior executives were involved in falsifying documents used to determine borrowers’ creditworthiness.

The bank was specifically ordered to report on loans it made to customers who invested in ‘shared house’ facilities operated by Smart Days Inc, which had filed for bankruptcy. Suruga Bank later admitted to falsifying documents and other improprieties in the project.

According to Nikkei, the investigative panel’s draft report says the bank’s management failed to take reasonable caution against lending malpractice involving the falsification of documents when screening loan applications.

This was found to be particularly rampant in real estate lending. Of the bank’s JPY 3.15 trillion worth of outstanding loans, about JPY 2 trillion was extended to real estate investors. Over 30 percent of total lending and about half of real estate-related lending involved inappropriate screening, Nikkei reported.

Suruga Bank staff reportedly turned a blind eye to property sellers’ documents stating bloated appraisal figures, knowing that the numbers were false. The bank was also found to have used documents with fabricated occupancy rates, rental income and other information.

A Nikkei source said a majority of Suruga’s financing of real estate investments involved some form of improper conduct, such as inflating the annual incomes and bank balances of borrowers.

The investigative panel’s report, to be publicly disclosed by the end of this month, is expected to force Suruga Bank to name the managers responsible for the inappropriate loans and drastically reform its practices.

Last month it was reported that multiple sources at the bank disclosed that a board member in charge of sales played a leading role in making the illegal loans, with the cooperation of another director responsible for screening of loan applications, leading to suspicions that the bank itself was systematically involved.

Experts say other regional lenders may also have succumbed to similar pressures to falsify paperwork to meet high lending targets amid shrinking local economies and near-zero interest rates squeezing lending margins.

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