Basic risk management policy

Another integral aspect for adequately taking advantage of growth opportunities in the market is the suppression of non-performing debt. The fact that expanding financing while ignoring credit risk will shake the operations of parent financial institutions is evident just by looking at the banks that went bankrupt following the collapse of the bubble. In this respect, we thoroughly manage the credit risk of our client companies and have maintained sound lending assets by focusing on minimizing non-performing debt with our outstanding ability to manage debt and our policy of appropriate risk management.

(1) Three counter measures
Our basic policy concerning risk is to conduct the following three forms of lending: (1) Small value lending (an average loan amount of 4.34 million yen for the year ended in July 2003), (2) Short-term lending (average loan period for all products of 10.12 months), and (3) Retail lending only to end users. We have strictly followed this policy since our founding.

(2) Cash flow profit system
The cash flow profit system is the ultimate profit index of SFCG calculated by subtracting all stagnant credit from gross operating revenues. In order to comply with this policy we have established the crucial points for our risk management as: sales personnel are not only to promote sales but are to be all-round players who also are responsible for screening and collections, and the utilization of an assessment system that not only focuses on the accelerator aspect of promoting financing sales but also the brake of managing debt, so that sales personnel can be fairly assessed as all-round players. This makes each profit center even more sensitive to delinquent debt and automatically leads to the minimization of delinquent debt. This activity is a signature activity of ours that completely prevents the occurrence of non-performing debt at the operating site and enables quick collection.

(3) Prepare for worst scenario
In addition to the above three basic policies, we have analyzed the conditions during the Great Depression of 1929 with the idea of “Always being prepared for worst case scenarios.” Based on data indicating that after the Great Depression stock prices fell to one sixteenth of their peak and real estate to one eighth of their peak, we terminated the provision of financing based on stock collateral in 1986. This policy continued to be followed in 1999 when we were the first to integrate and scrap branches upon entering the era of shohkoh (commercial) loan industry bashing in 1999. We first analyze the risk in the worst-case scenario and after replacing existing risk with this calculated risk, we take risks within the allowable range. This is our basic stance concerning risk.

Initial Credit

When we receive an application for financing from a customer, our sales personnel first visit the customer and conduct a face-to-face screening. The objective of this meeting is to have the customer properly understand our company and to make a more accurate judgment by actually having a sales representative meet the customer.

Furthermore, in addition to our traditional careful screening, we have introduced an automatic scoring system for Quick Business Loans and Discounted Commercial Notes. Our sales representative obtains necessary information from the customer and compares it to the scoring. This enables the disparity in screening standards among each screening personnel to be minimized in the initial credit screening. This has also led to greater screening speed.

In regards to the flow from screening to the execution of financing, the sales representative and sales office manager determine the appropriateness of the case and send those that they deem can be provided financing to the Credit Control Department. The authority to provide financing at SFCG lies exclusively with this Department and all cases are cleared by it. The set of circulars obtained from the customer by the sales office is sent to the Department, which then conducts a careful scoring-based screening in one to two days. In this manner, we meet the needs of customers that have a sudden need for funds.

Interim Credit Management

The credit assessment of customers after providing the financing is conducted on a monthly basis by checking their interim credit.

The management call center conducts the interim credit check. The interim credit check, in other words, the monitoring of customer credit conditions on a monthly basis, is conducted via monthly courtesy calls from sales representatives (calls to confirm the interest, funding needs and any signs of irregularity). In addition, the head office has used the management call center to form an objective monitoring system. In addition to checking the conditions of the customer, the management call center also checks the conditions of the guarantors. The thorough implementation of this interim credit system enables the complete prevention of deterioration in operating debt.

Debt Management

The standards for problem debts as defined internally by our company are stricter and broader than the standards of banks. Even if the case is not very serious, when we make a judgment in the interim credit check that the debt may become non-performing, we strengthen our security by placing the debt under management. Managed debt includes that for which payment has been delayed by a month or longer, dishonoring of the borrower or guarantor payments, bankruptcies of said parties and also some abnormalities within the interim credit check. This abnormal debt found within the interim credit check is handled carefully. Under some conditions, the borrower is asked to pay some of the principle or to add a guarantor and this is then followed by another review and approval process before the debt can be once again handled as normal debt. The business environment of small and medium-sized companies changes frequently and it is crucial to quickly detect and handle debts that may fail. This is a unique aspect of our debt management and also a part of our know-how.