Oct. 6 (Bloomberg) -- Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.

“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

The Topix Banks Index has fallen 9.2 percent since Kamei, who has blamed “unbridled capitalism” for the global credit crisis, was appointed by Prime Minister Yukio Hatoyama on Sept. 16. Kamei’s plans may put pressure on large banks’ credit ratings, said Naoko Nemoto, managing director at Standard & Poor’s in Tokyo.

“Easing debt classifications means less transparency and causes anxiety for overseas investors,” said Nemoto. “They may lose business opportunities overseas and find it difficult to raise funds abroad.”

Potential to ‘Backfire’

Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged.

“There is a potential for any proposal along the lines Kamei has made of debt moratoriums to backfire horribly,” said David Threadgold, a Tokyo-based analyst at Fox-Pitt Kelton. The plan could make banks more reluctant to lend to small firms, Threadgold said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.

Corporate bankruptcies increased 12 percent to 16,146 in the year ended March 31, the highest in six years, according to data from Tokyo Shoko Research Ltd. Loans to small enterprises fell 2.3 percent in August from a year earlier, the ninth-month of declines, according to data from the Bank of Japan today.

‘Extremely Easy’ Money

“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

Publicly-traded companies probably won’t be encompassed by the program, Kamei said. Japanese “salarymen” struggling to pay mortgages after bonus cuts may be eligible, he said. “We’re going to make it extremely easy for very small companies to get money,” Kamei said.

The government will make allowances for any lenders whose capital ratios fall because of the moratorium legislation, which may be submitted to parliament next month.

Bank stocks rose, with Mitsubishi UFJ Financial Group Inc., the nation’s biggest lender by market value, gaining 4.4 percent to 475 yen at the close of trading in Tokyo. Sumitomo Mitsui Financial Group Inc. increased 3.6 percent and Mizuho Financial Group Inc. rose 2.8 percent.

Kamei’s deputy minister, Kouhei Ohtsuka, who is leading a team that’s studying options for legislation, told Fuji Television on the weekend that banks shouldn’t “worry” because the government’s proposals will be workable.

Lawmakers and government officials were set to hold their first working-team meeting on legislation yesterday, Ohtsuka told reporters on Sept. 29.

Bank Lobbies

Katsunori Nagayasu, president of Mitsubishi UFJ’s main banking unit and head of the Japanese Bankers Association, is ready to cooperate in aiding small companies, Kamei said Oct. 1. Kamei, who met Nagayasu that day, said at the time he would start taking opinions from banker lobbies from Oct. 7.

Kamei met yesterday with Tadashi Ogawa, head of Regional Banks Association and president of Bank of Yokohama Ltd. Ogawa said last month that regional lenders aren’t forcing troubled borrowers to repay loans and are dealing with requests to reschedule repayments on an individual basis.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto@bloomberg.net; Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: October 6, 2009 02:31 EDT