Incubator Bank seeks outside help

The troubled Incubator Bank of Japan plans to rebuild itself from a debilitating scandal and bad loan problems through tie-ups with foreign and domestic financial firms and funds, sources said.

The bank, whose operations have been partially suspended over allegations it obstructed inspections by financial authorities, hopes to reach a partnership agreement as early as the end of this month, the sources said.

Funding offers have come from more than a dozen companies, including financial institutions and investment funds based in Japan, China, South Korea, Europe and the United States, the sources said.

Some of the proposals involve multiple companies jointly offering funds to the bank.

The Incubator Bank is expected to require an increasing amount of reserves as the extent of its bad loan problem becomes clearer. Some experts estimate the bank will need tens of billions of yen to deal with its nonperforming loans.

Late last month, current bank President Haruki Kohata and other executives informed FSA Commissioner Katsunori Mikuniya that the bank plans to seek partnerships with other companies to rebuild itself. The agency will likely accept the plan, sources said.

The Incubator Bank has already contacted prospective partners and will start whittling down the list before entering full-scale negotiations, the sources said.

Former bank Chairman Takeshi Kimura, former President Tatsuya Nishino and three others were arrested in July on suspicion of deleting hundreds of e-mails before an FSA inspection on the bank's health. Their actions were intended to conceal the size of the bank's bad loan problem, investigative sources said.

In closing its books in March 2010, the bank reported 5.1 billion yen ($60.6 million) in losses, its first net loss in four years. The bank is also expected to close about 20 of its 125 branches across the nation.

The decline of the Incubator Bank, which started operations in 2004 with the purpose of extending loans to cash-strapped small and medium-sized enterprises, was dramatic and ironic.

The bank drew wide attention because one of its founders, Kimura, had been an adviser to the FSA during the Junichiro Koizumi administration. In that capacity, Kimura was involved in establishing FSA guidelines for dealing with large amounts of nonperforming loans held by banks.

In May this year, the FSA ordered the Incubator Bank to partially suspend operations, including large-scale lending. It also instructed the bank to review the screening process for such loans.

After an in-house check that focused mainly on 150 companies that had received loans of 100 million yen or more, the bank discovered that a number of these loans were at risk of becoming uncollectible.