April 14 (Bloomberg) -- Japanese regulators ordered Aiful Corp., the nation's biggest consumer-finance company, to close branches for as long as 25 days as punishment for intimidation and other unacceptable collection tactics.

The Financial Services Authority said Aiful must shut all its branches nationwide for three days from May 8, the first such order for a listed financial company. Three outlets of the Kyoto- based firm were closed for 25 days and two for 20 days for intimidating families, illicitly obtaining powers-of-attorney and insisting customers borrow from a third party to make loan payments, the regulator said in a statement.

``Nationwide suspension is a very heavy punishment given the regulator's past actions,'' said Reiko Toritani, a senior director at Fitch Ratings in Tokyo. ``This may hit consumer lenders who have already been hurt by an eroding public image.''

Japan's four largest consumer lenders, which posted 1.66 trillion yen ($14 billion) revenue in the year ended March 2005, make loans of as little as $10 at thousands of offices and automated machines across Japan, using large billboards to guide customers to their outlets. Aiful had 1,777 offices as of Dec. 31, according to its Web site.

All four are run by billionaire families, according to Forbes magazine. Aiful President Yoshitaka Fukuda and his family ranked as Japan's eighth richest in Forbes's annual survey with a fortune estimated at $3.2 billion. Yasuo Takei, founder of rival Takefuji Corp. and Japan's richest man, was handed a suspended jail sentence in 2004 for ordering illegal wiretaps of journalists.

Apologies

Fukuda apologized to customers and shareholders at a press conference in Tokyo and said Aiful will abolish wage incentives, which he said helped cause the illegal actions.

Fukuda will take a 30 percent pay cut for three months and other executives' salaries will be lowered by 10 to 20 percent. The company said it will suspend advertising and other promotions for the next two months.

Shares of Aiful fell by their daily limit in Tokyo trading today, dragging down rival consumer lenders, on reports that the firm would be suspended. Orders to sell some 3.12 million Aiful shares were left unexecuted after the Tokyo Stock Exchange matched just 253,550 shares with buy orders.

``Investors are more sensitive to negative headlines after seeing interest rates and oil prices rise,'' said Hiroshi Chano, who helps manage $6.7 billion at Yasuda Asset Management Co. in Tokyo.

Stock Downgraded

Merrill Lynch & Co. consumer finance analyst Norimasa Ejiri downgraded Aiful to ``sell'' from ``buy'' today. He said reports on the regulatory order surprised investors and may prompt more sell orders.

Kyoto-based Aiful lost a fifth of its market value in January after Japan's Supreme Court ruled it can't force customers to pay interest rates higher than the 20 percent limit imposed on banks. Aiful, which says it charges an average 24 percent on unsecured loans, and rival non-banks have been able to charges as much as 29.2 percent if customers agree to a higher rate.

``There is obviously a great deal of work that needs to be done in terms of consumer protection,'' Thierry Porte, president of Shinsei Bank Ltd., told reporters in Tokyo today. ``The industry itself needs to take the lead in setting standards.'' Shinsei holds a controlling stake in lender Aplus Co.

Investors Concerned

Investors have fled Japan's consumer lenders this year on concern the court ruling and a drive by regulators to eliminate those ``grey zone'' rates will erode earnings. Masazumi Gotoda, the government's point man on consumer borrowing, in February said he wants a single limit on bank and non-bank interest charges.

Japan's four biggest consumer lenders account for 28 percent of the index tracking non-bank financial firms, which fell 5.5 percent this year even as the benchmark Topix climbed 5.3 percent.

Shares of Acom, the second-biggest consumer lender, Takefuji and Promise all fell as much as 6.7 percent. Acom closed 3.9 percent lower at 6,860 yen; Promise fell 4.7 percent to 7,170 yen and Takefuji lost 3 percent to 7,550 yen.

``Any effects from the punishment won't be large,'' said Nobuyuki Okumura, an analyst at Rating and Investment Information, Inc. ``It will be limited to delays in the collection of loan payments.''

Aiful will be allowed to accept payments from borrowers who visit offices voluntarily, according to the agency's statement.

Ratings Effect

Standard & Poor's Ratings Services said today there would be no impact on its BBB+ credit rating on Aiful Corp.

``The administrative sanction will not have a direct impact on Aiful's credit quality, although it may result in a temporary decline in new lending,'' S&P said in a statement.

Fitch Ratings cut its outlook on Aiful to negative from stable today, citing concerns over the long-term effect on the lender's business. Fitch affirmed Aiful's long-term rating at A-, the seventh-highest of 10 investment grades.

The lender and its rivals are increasing provisions as consumers more frequently take legal action against interest charges when they can't pay debts. Aiful charges an average of 24 percent for unsecured loans, according to its Web site. It had more than 1.1 trillion yen of such loans as of Sept. 30.

Aiful said earlier this month profit declined 10 percent to 67.9 billion yen ($572 million) in the year ended March 31. The figure was preliminary and the company is expected to report earnings next month.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

Last Updated: April 14, 2006 05:22 EDT