Risk Management System
As the management environment surrounding the Company changes, risks to be managed are becoming more complex and diverse. Under such circumstance, the Company recognizes that one of the most important management issues is to enhance and strengthen the Company’s risk management system to fully recognize risks, maintain sound management, and ensure stable profitability and growth. The Company identifies, evaluates, and controls risks through the departments and sections in charge of risks to be managed as stipulated in the Risk Management Regulations, and these risks are managed by the Corporate Risk Management Department in an integrated manner. Activities for managing risks arising in execution of business operations are discussed and reported at the Risk Management Report Meeting. The Risk Committee deliberates on important matters related to risk management, monitors the status of risk management and other activities, and reports the results or makes recommendations to the Board of Directors.
Risk management system
Risks Related to Business
The Company determines the magnitude of risks based on the probability of risk scenarios and the degree of their impact, and identifies the risk events that require the most attention during the year as top risks. For the identified top risks. the Company assesses increases and signs of such risks and takes necessary countermeasures to control them. In addition, in the event that a risk materializes, the Company has a system in place to respond promptly. Top risks are discussed by the Risk Committee and resolved by the Executive Committee each fiscal year.
|Decrease in revenues from business
|Increase in credit costs
|Increases in provision for bad debts for the loan and credit card business, the guarantee business, and the overseas financial business
|Impact of external factors
|Situations in which the Company’s business performance is materially affected by external factors such an epidemic, natural disaster, and terrorist attacks
|Increase in interest repayment
|Larger-than-expected amount of interest repayment resulting in an additional provision for loss on interest repayment
|Situations that may significantly affect stakeholders from the viewpoint of consumer protection, maintenance of market integrity, etc.
|Deteriorated cash flows of the Company due to rising market interest rates, declining operating results of the Company, rating downgrades, etc.
|Shortage of human resources
|Decreased competitiveness due to shortage of necessary human resources
Of the risks associated with the businesses and others of the Company Group, we have listed major items that could materially affect the decision of investors based on the analysis of the top risks stated above.
This section includes forward-looking statements that are based on assumptions made as of the submission date of this securities report if not stated otherwise.
- Decrease in business revenue
The Company Group has positioned the loan and credit card business, the guarantee business, and the overseas financial business as its three core businesses, and is working on a range of initiatives in a bid to increase revenues from these businesses in a stable and sustainable manner. For the fiscal year ended March 31, 2023, operating revenue came in at 273,793 million yen (up 4.4% year-on-year), of which revenue from the loan and credit card business amounted to 145,174 million yen (up 2.0% year-on-year), revenue from the guarantee business amounted to 66,278 million yen (up 5.4% year-on-year), and revenue from the overseas financial business amounted to 56,537 million yen (up 10.3% year-on-year). These three core businesses represented 97.9% of the consolidated operating revenue.
Risks that could drive down revenues from these businesses are as follows:
- 1) Loan and credit card business
- Revenue from the loan and credit card business fluctuates depending on increases/decreases in the number of customer accounts, increases/decreases in the loan balance per customer account, the average contracted interest rates received from customers, and other factors. Therefore, external factors related to these elements could affect the segment’s business performance.
In addition, a decrease in competitiveness with rival companies due to a lack of ability to provide IT services that suit to customers’ needs could also affect the segment’s business performance.
Such external factors include changes in judicial rulings and legal regulations applicable to the consumer finance industry, intensified competition with rival companies, entry of new companies, a slowdown in consumer spending in the wake of large-scale accidents, disasters and the spread of epidemics.
The loan and credit card business represented 53.0% of total operating revenue, and in light of the fact that a decrease in revenues from this business segment would have a significant impact, the Company is striving to attract new customers, improve product/service functions and take other initiatives. In addition, the Group has systems to regularly manage and analyze changes in interest on operating loans from the plan and report these changes and various countermeasures to the Risk Management Report Meeting and the Risk Committee, and appropriately controls risks.
- 2) Guarantee business
- Revenue from the guarantee business fluctuates depending on increases/decreases in the number of guarantee accounts, increases/decreases in the balance per account, guarantee commission rates from partnering financial institutions, and other factors. Therefore, external factors related to these matters could affect the business performance of the Company and MU Credit Guarantee Co., LTD.
Such external factors include changes in judicial rulings and legal regulations applicable to financial institutions such as banks and a slowdown in consumer spending in the wake of large-scale accidents, disasters and the spread of epidemics.
The guarantee business represented 24.2% of total operating revenue, and in light of the fact that a decrease in revenue from this business segment would have a significant impact, the Company and MU Credit Guarantee Co., LTD. worked on measures to enhance partnerships with existing partners, continued appropriate screening, provided the results of analysis about loan portfolio and the effect of advertisement, and offered various support to existing partners with a view to enhancing their business results and stabilizing their growth.
In addition, the Group has systems to regularly manage and analyze changes in revenue of the guarantee business from the plan and report these changes and various countermeasures to the Risk Management Report Meeting and the Risk Committee, and appropriately controls risks.
- 3) Overseas financial business
- Revenue from the overseas financial business fluctuates depending on increases/decreases in the number of customer accounts, increases/decreases in the loan balance per customer account, the contracted interest rates received from customers and other factors. Therefore, external factors related to these matters could affect the business performance of EASY BUY Public Company Limited (hereinafter “EASY BUY”) in the Kingdom of Thailand and ACOM CONSUMER FINANCE CORPORATION (hereinafter “ACF”) in the Republic of the Philippines.
Such external factors include changes in the impact of interstate conflicts and resulting economic sanctions, judicial rulings and legal regulations applicable in countries where these companies operate, intensified competition with rival companies, a slowdown in consumer spending in the wake of large-scale accidents, disasters and the spread of epidemics, as well as fluctuations in foreign exchange rates.
The overseas financial business represented 20.6% of total operating revenue, and in light of the fact that a decrease in revenue from this business segment would have a significant impact, the Company is striving to attract new customers, improve product/service functions and taking other initiatives at two subsidiaries: EASY BUY and ACF.
In addition, the Group has systems to regularly manage and analyze changes in operating revenue of EASY BUY, the largest consolidated subsidiary in the overseas finance business, from the plan, and report these changes and various countermeasures to the Risk Management Report Meeting and the Risk Committee, and appropriately controls risks.
- Increase in credit costs
For accounts receivable - operating loans, accounts receivable – installment and right to reimbursement, which constitute the majority of total assets of the Company Group, we have recognized provision for bad debts (the sum of provision of allowance for doubtful accounts and provision for loss on guarantees, etc.) and estimated values of collaterals pledged, etc. However, an increase of payment delays might occur as a result of decline in customers’ creditworthiness due to potential future changes in economic conditions, the market environment, and the social structure in Japan as well as revisions in legislation . Such events could require further increases in provision for bad debts, and as a result, may have a negative effect on the business performance of the Company Group.
Therefore, the Group will regularly monitor customers’ creditworthiness to maintain the soundness of the loan portfolio.
- Situations in which the Company’s business performance is materially affected by external factors
- 1) COVID-19 infection
- COVID-19 was gradually converging. In the event of resurgence, the following descriptions may affect the Company Group’s business results.
Reductions in the operating hours of automatic contract machines and some operations based on reviews of operating days and operating hours at call centers, etc.; as well as decreases in the balances of the loan and credit card business, the guarantee business and the overseas financial business, as well as operating revenue, attributable to the decline in the demand for funds mainly associated with voluntary restrictions in customer activities outside of the home.
Increased provision for bad debts caused by a deteriorated loan portfolio mainly attributable to decreased customer income.
- 2) Accidents and disasters, etc.
- Natural disasters, such as earthquakes, wind and flood damage, conflicts, or terrorist attacks in the highest concentrated areas of our business bases such as the Tokyo metropolitan area could cause damage to our facilities and equipment or physical damage to employees or customers, and as a result, could have a negative effect on the performance and business continuity of the Company Group.
To prepare for unforeseen events such as these, the Group has established a business continuity plan and prepared a backup system that includes call centers and core systems.
As for responses in the event of disasters, the Group strives to develop and strengthen systems to ensure the continuity of material business operations by regularly conducting education and training to confirm the effectiveness of such responses.
- IT related risks
The Company Group has a large-scale computer system and processes personal data and other information using a communication network and systems at each of our business locations, as well as those of our customers and other external parties connected to our group, and strives to appropriately manage and handle information.
However, the Group may not be able to completely prevent system outages, malfunctions or unauthorized use of systems, falsification or leakage of electronic data, or the suspension of support services by telecommunications carriers and computer system companies in the event of delay in the planning and development of important IT system projects, system failures, cyber-attacks, unauthorized access, computer virus infections, disasters, or other exogenous events.
In such cases, the provision of customer services and our group’s business operations may be hindered, trust in our group may be damaged, and our business performance may be affected.
To ensure the stable operation of its systems, the Company Group has made efforts to prevent system failures and other problems by monitoring throughout system planning, development, and operation, and has put in place management structure and procedures to reallocate resources and prepare for unforeseen events, as well as training and other measures.
- Increase in interest repayment
The interest rates charged on some loan products by the Company, in which customers entered into contracts before June 17, 2007, exceed the interest rate ceilings specified in the Interest Rate Restriction Act.
Although the interest exceeding the interest ceilings specified in the Interest Rate Restriction Act is stipulated to be invalid, before the revised Money Lending Business Act was fully reinforced on June 18, 2010, it was determined under the Interest Rate Restriction Act that debtors who had voluntarily paid said excessive interest could not request for interest reimbursement. In addition, Article 13 of the supplementary provisions of the Money Lending Business Act before its full enforcement stipulated that such payment of interest exceeding the interest ceilings could be deemed an effective interest repayment under the condition that certain requirements be satisfied.
However, the verdict handed down by the Supreme Court on January 13, 2006, stated that in the case of a delayed repayment of the agreed interest, to which a contractual clause of “forfeiture of benefit of time” was attached, said payment of the interest exceeding the interest ceilings could be considered enforced without satisfying the “deemed repayment requirements,” which need specific voluntariness in payment. Consequently, by reason of the above verdict of the Supreme Court, several consumers have taken legal action against consumer finance companies, calling for a reimbursement of payments made, in some recent court precedents, the plaintiffs’ demands were accepted.
In case our customers request a reduction in the loan amount or reimbursement of excess interest paid, the Company may accept to write off such loan or reimburse payments.
Though the costs of write-off and reimbursing repayments (hereinafter referred to as “loss on interest repayment”) have steadily decreased, close attention should be paid to the number of requests for interest repayment. Future potential for loss on interest repayment, further booking of the provision for loss on interest repayment, and court rulings from lawsuits demanding refunds of interest paid that put the Company and other money lenders at a clear disadvantage, could have an impact on the Company’s business performance.
Considering that loss on interest repayment has been consistently decreasing each fiscal year since the fiscal year ended March 31, 2011, the peak period, it is thought that the possibility of a sharp increase in interest repayment is limited. However, future trends need to be closely monitored on an ongoing basis, as loss on interest repayment is susceptible to the impacts of changes in the external environment.
In addition, we determine, in advance, a standard value for loss on interest repayment at each quarter end, and have a system to manage and report on the status of disparity between actual results and standard value for loss on interest repayment, thereby appropriately controlling risk.
- Conduct risk
A loss of confidence from customers and the consumer finance market due to inappropriate behavior by officers and employees or deviation from social norms could have an impact on the Company Group’s business performance.
The Company Group has established the ACOM Group Code of Ethics and Code of Conduct, which set forth the basic values and policies we must be aware of when practicing compliance and the standards for behavior we must observe in order to put these values and policies into practice. Through training programs for officers and employees, the Company has been striving to foster a culture of correct behavior.
In addition, the Company has taken preventive measures to deter and detect violations of laws and regulations and misconduct, and is engaged in consumer education activities, stricter credit operations, and transaction monitoring to protect customers.
- Fund procurement
The Company Group secures the necessary funds for its operations and liabilities repayments through indirect financing such as borrowings from financial institutions, etc. and direct financing from capital markets, including via bond issues.
On the other hand, there is a possibility that its existing main banks and lenders will change their current lending policy due to a potential reorganization of the financial industry or other factors. Furthermore, there is no assurance that capital markets will always be available as a reliable financing resource in the future.
In addition, if the Company Group’s business environment deteriorates due to a sharp rise in market interest rates, deterioration in the Company Group’s business performance, changes in credit ratings and other factors, it could increase financial expenses or limit the amount of funds to be procured, thereby affecting the Company Group’s business performance.
Therefore, the Company Group appropriately controls risks by fixing interest rates, maintaining long- and short-term financing ratios, leveling amounts involved in repayments of borrowings, and diversifying financing methods, while maintaining a certain amount of liquidity.
- Shortage of human resources
In particular, we engage in human resource development through means such as securing excellent and promising human resources through recruitment activities for new graduates and mid-career hires while enhancing the training system, including selective training and digital human resource development program, based on the Policy on Human Resource Development.
In addition, we strive to improve job satisfaction and workplace comfort through enhancing various personnel systems, such as increasing base salary, introducing secondary job/concurrent employment system, etc., welfare plans, initiatives to ingrain the Vison and offering support for self-development.
Business Continuity Plan (BCP)
The Acom Group has formulated BCP to ensure the safety of employees and their families in the event of natural disasters such as large-scale earthquakes, the spread of infectious diseases, terrorist attacks and other crisis events, while ensuring that significant business operations are not interrupted or, if interrupted, that they are resumed as swiftly as possible.
As specific activities, we have established two business locations, prepared a crisis management manual and stockpiled food and drinking water to minimize economic losses and loss of credibility.
In addition, we conduct evacuation drills and safety confirmation drills, and once a year we conduct a joint business continuity drill with the MUFG Group to promote cooperation among the Group companies.