Citibank 2010 Annual Report Download - page 51

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Japan Consumer Finance
Citigroup continues to actively monitor a number of matters involving its
Japan Consumer Finance business, including customer refund claims and
defaults, as well as financial and legislative, regulatory, judicial and other
political developments, relating to the charging of gray zone interest. Gray
zone interest represents interest at rates that are legal but for which claims
may not be enforceable. Although Citi determined in 2008 to exit its Japan
Consumer Finance business and has been liquidating its portfolio and
otherwise winding down the business, this business has incurred, and will
continue to face, net credit losses and refunds, due in part to legislative,
regulatory and judicial actions taken in recent years. These actions may also
reduce credit availability and increase potential claims and losses relating to
gray zone interest.
In September 2010, one of Japan’s largest consumer finance companies
(Takefuji) declared bankruptcy and is currently in the process of
restructuring, with court protection and assistance. Citi believes this action
reflects the financial distress that Japan's top consumer finance lenders are
facing as they continue to deal with liabilities for gray zone interest refund
claims. During 2010, LCL recorded a charge of approximately $325 million
(pretax) to increase its reserves related to customer refunds in the Japan
Consumer Finance business.
Citi continues to monitor and evaluate these developments and the
potential impact to both currently and previously outstanding loans in
this business, and its reserves related thereto. However, the trend in the
type, number and amount of claims, and the potential full amount of
losses and their impact on Citi, requires evaluation in a potentially volatile
environment, is subject to significant uncertainties and continues to be
difficult to predict.