From lending money to lending goods

December 2, 2019
by Noriyuki Morimoto

When it comes to bank loans, if banks are to ensure that they truly meet the customer’s needs, they will ultimately have to revisit the purpose of the loan itself.

For instance, if the purpose of financing is to purchase goods such as equipment, the objective may be met directly by lending the goods themselves. If it is determined that lending the goods better suits the customer’s true interest, based on a comparison of the two methods from the perspective of the fund-raising company, you can go on to lend the goods.

It is just the logic of the lender’s side, as well as financial regulators, to say that banks lend money and leasing companies lend things. From the borrower’s logic, either borrowing money or things should be sufficient as long as the suggestion is in one’s best interest.

However, due to complicated circumstances including the historical background, the basic structure of financial regulations is designed to regulate service providers. As a result, when a company looks to raise funds, providers of different services have to make offers independently: banks offer loans, securities companies underwrite shares and bonds, and leasing companies provide leases.

Even so, regulations are becoming more flexible, and large financial groups, with diversified financial operations under a holding company, are now able to make comprehensive proposals based on the perspective of the fund-raising client. It is also common for a bank to own a leasing company under its group. As a financial group, you can lend money and also lend things, albeit under certain restrictions.

Essentially, the borrower’s logic would say you should be able to choose whichever is beneficial, whether it is money or goods, but what are the criteria for decision-making? The answer is the risk burden.

Physical things come with risks such as the danger of breakdowns and obsolescence. Possessing equipment comes with the risk of utilization ratios. Therefore it is important to have a mechanism to share these risks between the lender and the borrower in an appropriate manner, that is, optimized risk-sharing.

 

[ Category / Deconstruction of Finance]