NIS Nis Grp. CO Ltd

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2007

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

o		SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                                         

Commission file number: 1-31416

NIS GROUP Kabushiki Kaisha

(Exact name of Registrant as specified in its charter)

NIS GROUP CO., LTD.

(Translation of Registrant’s name into English)

Japan		Shinjuku L-Tower 25F 6-1, Nishi Shinjuku 1-chome Shinjuku-ku, Tokyo 163-1525 Japan
(Jurisdiction of incorporation or organization)		(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock*		New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 142,476,902 shares of our common stock outstanding at March 31, 2007, including 60,239,900 shares represented by 6,023,990 American Depositary Shares, or ADSs, as adjusted for our 1-for-20 reverse stock split and concurrent change in the ratio of shares of common stock represented by each ADS from one ADS representing 10 shares to two ADSs representing one share, effective as of August 31, 2007.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  þ

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes  o  No  þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ      Accelerated filer  o      Non-accelerated filer  o

     Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o  Item 18  þ

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ

 

 

*		Not for trading, but only in connection with the listing of American Depositary Shares, each of two American Depositary Shares representing one share of our common stock.

TABLE OF CONTENTS

		Page
PART I
Item 1. Identity of Directors, Senior Management and Advisers			5
Item 2. Offer Statistics and Expected Timetable			5
Item 3. Key Information			5
Item 4. Information on the Company			20
Item 4A. Unresolved Staff Comments			45
Item 5. Operating and Financial Review and Prospects			46
Item 6. Directors, Senior Management and Employees			82
Item 7. Major Shareholders and Related Party Transactions			95
Item 8. Financial Information			99
Item 9. The Offer and Listing			101
Item 10. Additional Information			104
Item 11. Quantitative and Qualitative Disclosures About Market Risk			121
Item 12. Description of Securities Other than Equity Securities			124
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies			125
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			125
Item 15. Controls and Procedures			125
Item 16A. Audit Committee Financial Expert			126
Item 16B. Code of Ethics			126
Item 16C. Principal Accountant Fees and Services			126
Item 16D. Exemptions from the Listing Standards for Audit Committees			127
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers			128
PART III
Item 17. Financial Statements			129
Item 18. Financial Statements			129
Item 19. Exhibits			129
Index to Financial Statements			F-1
EX-1.1 Articles of Incorporation
EX-1.2 Share Handling Regulations
EX-1.3 Regulations of the Board of Directors
EX-1.4 Regulations of the Board of Statutory Auditors
EX-2.1 Specimen of Common Stock Certificates
EX-8.1 List of Subsidiaries
EX-11.1 Code of Ethics
EX-12.1 Certification of the Principal Executive Officer Required by 17 C.F.R.240. 13a-14(a)
EX-12.2 Certification of the Principal Executive Officer Required by 17 C.F.R.240. 13a-14(a)
EX-12.3 Certification of the Principal Financial Officer Required by 17 C.F.R.240. 13a-14(a)
EX-13.1 Certification of the Chief Executive Officer Required by 18 U.S.C. Section 1350
EX-13.2 Certification of the Chief Executive Officer Required by 18 U.S.C. Section 1350
EX-13.3 Certification of the Chief Financial Officer Required by 18 U.S.C. Section 1350

Certain Defined Terms, Conventions and Presentation of Financial Information

     As used in this annual report on Form 20-F, unless the context otherwise requires, the “Company” refers to NIS Group Co., Ltd. and the “Group” refers to NIS Group Co., Ltd. and its subsidiaries. Also, references to “we” “our” and “us” are to the Company or the Group as the context may require.

     In this annual report on Form 20-F, “subsidiary” and “subsidiaries” refer to consolidated subsidiaries of the Company, which include companies in which the Company owns more than 50%, and “affiliate” and “affiliates” refer to all of our affiliates accounted for under the equity method, which include companies in which the Company owns 20-50% and has the ability to exercise significant influence over their operations.

     The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Unless otherwise stated or the context otherwise requires, all amounts in such financial statements are expressed in yen.

     In this annual report on Form 20-F, “yen” or “¥” means the lawful currency of Japan, and “dollar” or “$” means the lawful currency of the United States of America.

     Certain monetary amounts and percentage data included in this annual report have been rounded for the convenience of the reader. Accordingly, figures shown as totals in certain tables may not be equal to the arithmetic sum of the figures which precede them.

     The Company’s fiscal year ends on March 31. The fiscal year ended March 31, 2007 is referred to throughout this annual report on Form 20-F as “this fiscal year,” and other fiscal years are referred to in a corresponding manner. References to years not specified as being fiscal years are to calendar years.

Special Note Regarding Forward-looking Statements

     This annual report on Form 20-F contains forward-looking statements about our industry, our business, our plans and objectives, our financial condition and our results of operations that are based on our current expectations, assumptions, estimates and projections. These forward-looking statements are subject to various risks and uncertainties. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of financial condition, or state other forward-looking information. Known and unknown risks, uncertainties and other factors could cause our actual results to differ materially from and be worse than those contained in or suggested by any forward-looking statement. We cannot promise that our expectations, projections, anticipated results, estimates or other information expressed in or underlying these forward-looking statements will turn out to be correct.

     Important risks and factors that could cause our actual results to differ materially from the forward-looking statements are described in Item 3.D and elsewhere in this annual report on Form 20-F and include, without limitation:

	•		increasing competition among Japan’s finance companies and other financial institutions in the business owner and consumer loan industries;
	•		significant changes to the business environment for moneylending companies in Japan, including as a result of recent court decisions by the Supreme Court of Japan, and any future changes to laws and regulations;

	•		the effect of weak domestic economic conditions, including changes in corporate and personal bankruptcy and unemployment rates in Japan;
	•		the growing variety of legal means with which debtors can seek protection from creditors;
	•		changes to our portfolio of products and services and expansion into new business areas that do not achieve intended results;
	•		the effect of fluctuations in the value of real estate held or securing loans, which is highly dependent on the health of the Japanese economy and susceptible to regulatory and legal changes;
	•		fluctuation in market environments regarding our investments;
	•		our ability to pursue and maintain profitable strategic alliances, joint ventures and strategic investments;
	•		increasing competition in the loan servicing market in which Nissin Servicer Co., Ltd., a consolidated subsidiary, operates;
	•		risks associated with doing business in China, including extensive regulation and legal and market uncertainty;
	•		any future inability to obtain funds from lenders or access the debt capital markets on favorable terms;
	•		an increase in prevailing market interest rates;
	•		any failure to implement our business strategies successfully;
	•		the failure of our risk management systems to effectively evaluate and manage risks;
	•		our ability to adequately evaluate or control risks associated with loans or guarantees we make or related collateral;
	•		any disruption, outages, delays or other difficulties experienced by our information or technological systems and networks;
	•		misconduct by an employee or director and our exposure to negative publicity of the consumer or business finance industries generally or us specifically;
	•		any failure to maintain the confidentiality of personal information of our customers; and
	•		the influence of our chairman and his family over important decisions.

PART I

Exchange Rate Information

     For convenience, we have translated certain yen amounts in this annual report on Form 20-F into dollars at the rate of ¥118.05 = $1.00, the mean of the exchange rate quotations by The Bank of Tokyo-Mitsubishi UFJ, Ltd. for buying and selling spot dollars by telegraphic transfer against yen as of March 31, 2007, our most recent balance sheet date included in this annual report on Form 20-F. However, you should not construe such translations as representations that the yen amounts have been, could have been or could be converted into dollars at that or any other rate.

     The following table presents the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York:

D. Risk Factors.

Increasing competition among Japan’s finance companies and other financial institutions may adversely affect our ability to increase or maintain the size of our loan portfolio, the average credit quality of our customers or the interest rates we charge on our loans

     The loan finance industries in Japan’s financial sector are becoming increasingly competitive. In particular, competition for new customers has intensified primarily due to the entry into this industry of additional competitors, which has included entry through capital investments by major financial institutions and the establishment of joint venture corporations. In addition, some existing finance companies were acquired by corporations including information technology companies and foreign-affiliated financial institutions and subsequently enhanced their business. Many of these competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer histories, greater name recognition, more extensive physical infrastructure and networks of loan offices and more established relationships in the finance industry than we do. Our competitors seek to compete aggressively on the basis of interest rates, lending terms and the coverage and scale of their networks of distribution and marketing channels. Under these competitive pressures, we have focused our efforts on acquisition of prime customers with low credit risk, especially among small and medium-sized enterprises (“SMEs”) in Japan, including through alliances with various companies, in an effort to differentiate ourselves from our competitors. In June 2004, we reduced our involvement in the consumer loan business by selling a majority of the outstanding balance of our unguaranteed consumer loans to a third-party and strategically shifting our loan portfolio toward the provision of loans to SMEs and their owners, which typically carry lower interest rates than consumer loans. The weighted period-end average contractual interest rate on our outstanding loans decreased from 16.1% at March 31, 2006 to 13.8% at March 31, 2007 due to shifting our portfolio and concentrating on secured loans for property companies. If we are unable to match our competitors’ terms, we may fail to increase or maintain the number and average balance of our customer accounts, and our results of operations or financial condition could be adversely affected. If, on the other hand, we reduce interest rates on our products in response to competitive pressures, our interest margins will decline. Furthermore, the average credit quality of our customers may decrease if we are not able to attract prime customers, or if we lose these prime customers to our competitors, and our financial condition or results of operations could be adversely affected.

Significant changes to the business environment for moneylending companies in Japan, including as a result of recent court decisions by the Supreme Court of Japan, may continue to adversely affect us, and any future changes to laws and regulations may also adversely affect us

     Our business activities are subject to various laws and regulations in the countries in which we operate, primarily in Japan. Pursuant to the Law Concerning the Regulation on Acceptance of Contributions, Money Deposits and Interest (the “Contributions Law”), it is a criminal offence for any lending business to charge an interest rate exceeding a maximum interest rate of 29.2% per year. Separately, the Law Concerning the Regulation of Interest Rates (the “Interest Rate Restriction Law”) provides that an agreement for the payment of interest above a prescribed maximum rate is invalid with respect to the portion exceeding the maximum rate. As at the date of this annual report on Form 20-F, these prescribed maximum rates for the purposes of the Interest Rate Restriction Law are 20% per year for loans of less than ¥100,000; 18% per year for loans of ¥100,000 or more but less than ¥1 million; and 15% per year for loans of ¥1 million or more. However, notwithstanding the above restriction on interest rates under the Interest Rate Restriction Law, the Law Concerning Regulations on Moneylending Business, etc. (the “Moneylending Business Law”) provides that a payment by a borrower or guarantor of interest in excess of the prescribed maximum interest rates under the Interest Rate Restriction Law to a registered moneylender such as us is valid (and non-refundable) so long as such interest is paid voluntarily without coercion, mistake or threat and certain documentation requirements are satisfied (often called “deemed valid payments”). Interest that exceeds the prescribed maximum rates under the Interest Rate Restriction Law (but is below the maximum interest rate of 29.2% allowed under the Contributions Law) is often called “gray-zone” interest. The interest rates for all of our loan products are set below the maximum lending rate of 29.2% allowed under the Contributions Law, however, we continue to charge “gray-zone” interest to our customers, although loans with “gray-zone” interest are significantly decreasing.

     Since January 13, 2006, the Supreme Court of Japan decided a number of cases relating to the abovementioned laws that have negatively affected the ability of moneylenders like us to enforce deemed valid payments of “gray-zone” interest and have resulted in increased claims for repayment of “gray-zone” interest. In particular, in January 2006, the court ruled that the voluntary payment requirement for deemed valid payments under the Moneylending Business Law should be interpreted strictly, that an “acceleration clause” in a loan agreement is invalid with respect to a delay in the payment of excess interest and that, unless there is some particular situation such that the borrower is not misled into believing that such a clause is valid, the voluntary nature of excess interest payments, which is the requirement for deemed valid payments, will not be recognized. As a result of such court decisions, the Enforcement Regulation of the Moneylending Business Law was amended effective as of July 1, 2006 such that our loan documentation must now specifically provide that we may not accelerate a loan as a result of non-payment if such non-payment relates only to “gray-zone” interest.

     As a result of such court decisions and regulatory changes, and as a result of an increased number of borrowers in Japan encountering financial difficulties, we have recently experienced a greater number of claims for repayment of “gray-zone” interest. The total amount of refunds of excess interest repayments in cash and loan principal charged-off by excess interest repayments was ¥2,532 million and ¥5,230 million for the years ended March 31, 2006 and 2007, respectively. We have also been reducing the level of interest that we charge on loans to customers. (See “Business Overview — Our Operations — Integrated Financial Services Segment ” in Item 4.B of this annual report on Form 20-F.) Since a borrower may claim for refund of excess interest for up to 10 years, which is the statute of limitations, our total gross exposure may theoretically be up to the amount of excess interest received by us over the 10 years.

     In addition, in October 2006, the Japanese Institute of Certified Public Accountants issued “Audit Treatment of Reserve for Losses on Excess Interest Repayment Claims in Consumer Finance Companies” under which we are, in effect, required to keep a certain amount of reserves for losses on excess interest repayments to provide for probable refunds of “gray-zone” interest previously paid by borrowers. Accordingly, we increased our reserve for losses on excess interest repayments in cash and the portion of allowance for loan losses provided for loan principal charged-off by excess interest repayments based on our best estimation taking into account past experience and current conditions for refunding of excess interest. The amount of provision for losses on excess interest repayments for the year ended March 31, 2006 was ¥3,331 million. However, taking into consideration the current business environment, we modified our allowance to cover all estimated future repayments of excess interest derived from current loans receivable and loans previously paid-off or charged-off. Consequently, this provision for the year ended March 31, 2007 was ¥12,664 million.

     When excess interest is refunded to borrowers, the excess amount is first applied to the outstanding loan principal balance and charged-off from the principal. We have the legal right to offset such excess amount against the outstanding loan principal. If the excess amount is greater than the outstanding balance of loan principal, then we refund the deficit amount to the borrower in cash. We increased our allowance for loan losses to provide for loan principal charged-off by excess interest repayments, in addition to our reserve for losses on excess interest repayments in cash. (See “Operating Results — Critical Accounting Policies” in Item 5.A of this annual report on Form 20-F.)

     If the level of claims for repayment are higher than we anticipate, we may be forced to increase our allowance and reserve related to losses on excess interest repayments and in turn recognize additional provision for losses on excess interest repayments, which may substantially reduce our net interest income from lending activities. We may also be required to further reduce the level of interest charged to customers. Any or all of these factors could adversely affect our business, financial condition and results of operations.

     Furthermore, amendments to the Moneylending Business Law, the Contributions Law and the Interest Rate Restriction Law were promulgated on December 20, 2006 and are scheduled to become effective gradually over the next few years. As of an effective date to be fixed by a cabinet order to be issued within one year from the promulgation date, moneylending businesses will become subject to enhanced regulations (such as the introduction of additional documentary requirements and an increase in the number of prohibited activities) and enhanced supervision (through measures such as the introduction of business improvement orders). Within two and a half years from this effective date and approximately three years from the promulgation date, the amendments will be fully in force. When in force these amendments will:

	•		abolish the concept of deemed valid payments under the Moneylending Business Law;
	•		reduce the maximum interest rate under the Contributions Law from 29.2% per year to 20% per year;
	•		introduce administrative sanctions on charging interest in excess of the maximum interest rate under the Interest Rate Restriction Law;
	•		obligate registered moneylenders to investigate customers’ ability to repay and prohibit excessive lending in respect of loans to individual customers; and
	•		introduce further documentation requirements.

     These or other such legislative or regulatory changes or court decisions could adversely affect our business, financial condition and results of operations.

We may suffer larger loan losses if defaults on loans by our customers increase as a result of weak economic conditions in Japan or otherwise

     Weak economic conditions in Japan may lead to increased defaults on loans, including loans that we guarantee, which in turn would cause us to increase our charge-offs of loans and our provision for loan losses, thereby adversely affecting our results of operations and financial condition. In recent years, the economic environment in Japan displayed improvements in corporate profitability and business confidence, especially with respect to major companies, and rises in the stock and real estate markets. These trends also led to improvements in employment and personal consumption. However, disruptions to international credit markets triggered by a recent deterioration of the subprime-mortgage market in the United States, including increased defaults on home mortgages, have led to widespread difficulties in international markets including the New York Stock Exchange and Tokyo Stock Exchange, where our equity securities are listed. If these problems persist or continue to spread to other sectors, an economic downturn or recession in Japan could occur. Moreover, the Japanese economy still faces uncertainties such as inflation in prices for raw materials caused by the expansion of production activities, fiscal reconstruction, and potential changes to the social security system. If the economic situation in Japan worsens, we may be forced to charge-off loans in excess of our existing provision for loan losses, to increase our provision for loan losses, to pay out on loans that we guarantee beyond our reserve for guarantee losses, or to tighten our credit screening policies, which would limit our acquisition of new customers. In addition, we may not adequately evaluate or control risks associated with the loans we make, such as the creditworthiness of the borrower, and may experience greater defaults than we anticipate as a result. Any such factors could adversely affect our financial condition or results of operations.

An increasing number of our customers seeking protection from creditors under the Bankruptcy Law or related laws could require us to increase our provision for loan losses and charge-offs

     In recent years, the number of legal means with which retail borrowers can seek protection from creditors has increased. For instance, amendments to the Bankruptcy Law of Japan (the “Bankruptcy Law”) that became effective in January 2005 are aimed at achieving prompt, efficient, effective and fair procedures for personal bankruptcy, and to simplify the procedure for, and improve debtors’ protection under, personal bankruptcy. Under these amendments, an individual debtor can take advantage of a unified discharge procedure and a larger scope of assets that may be retained by insolvent debtors. These amendments to the Bankruptcy Law have also improved the effectiveness of the automatic stay, preference, offset and other practical provisions for fair treatment among creditors. We generally recover very little of any loan made to a customer that has entered personal bankruptcy proceedings.

     This and other laws of Japan, including the Special Conciliation Law and the Civil Rehabilitation Law, may discourage borrowers who would otherwise make an effort to repay the entirety of their loans from doing so if they perceive a relative ease of using these legal means to discharge their debts. As a result, the number of our customers who seek legal protection from enforcement of terms of payment or adjournment of payment may increase. If, as a result, the number of delinquent loans increases, we may be required to charge-off those loans or increase our provision for loan losses and our results of operations could be adversely affected. Any further amendment to the Bankruptcy Law or related laws that increases protection of the assets of individual debtors or reduces the burden of declaring personal bankruptcy would also have a materially adverse impact on our results of operations.

We may change our portfolio of products and services from time to time and expand the business areas in which we operate but may fail to achieve the intended results

     While we were traditionally a finance company that specialized in unsecured lending to individuals in Japan, we review our portfolio of products and services on an ongoing basis and change them as appropriate to remain competitive in the markets that we serve. For example, in June 2004, in response to the diversified needs of SMEs and consumers, as well as to maximize our corporate value, we sold most of the outstanding balance of our unguaranteed consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.), a consumer finance company, in order to concentrate our resources on providing loans with guarantors, such as our “Business Assist loans,” and otherwise serving SME owners. With respect to financial services for SME owners, in addition to extending “Business Assist loans” and “Business Timely loans,” which are unguaranteed, unsecured loans made under pre-approved revolving credit lines to SME owners, we also concentrate on the provision of real estate finance, and leases and installment loans. With respect to the quality of operating assets, we seek to accumulate prime assets with lower credit risks through acquisition of prime customers through the promotion of our alliance strategy.

     Changes in our portfolio of products or services, including those described above, may fail to generate the results we desire and adversely affect our results of operations or financial condition. For example, deterioration of the quality of our operating assets due to deterioration in the financial condition of SMEs caused by rapid changes in the economic environment and other factors could adversely affect our financial condition and results of operations.

     In addition, we have expanded and plan to continue to expand the business areas in which we operate. Principally, in addition to providing integrated financial services to SMEs and their owners in Japan, we also engage in real estate-related businesses (including providing secured loans to property companies and principal investment in real estate), distressed loan servicing, investment banking, securities and venture capital operations and leasing operations. As we expand our business operations, we compete with companies that we did not previously consider to be competitors and who often have established track records and greater name recognition, substantially larger financial, technical, personnel and marketing resources and larger customer bases than we do. There can be no assurances that we will be successful in expanding our operations in each of these business areas in line with our management’s expectations or at all. If we are unable to compete, we may fail to expand our operations and our financial condition or results of operations could be adversely affected.

     Our success also depends on our ability to attract and retain employees with the skills and market knowledge that will allow us to expand our various businesses. Competition to employ and retain such personnel is high. There can be no assurance that we will successfully and consistently meet personnel recruitment and retention goals, and any failure to do so may restrict our ability to develop our businesses and may have adverse effects on our business, financial condition and results of operations.

Our real estate-related businesses are subject to numerous risks, including the health of the Japanese economy, regulatory and legal changes, and our ability to adequately evaluate and manage these risks

     Recently, our secured loans portfolio has grown significantly, reflecting our strategic shift towards the promotion of financial services to SMEs and their owners centering on real estate financing to property companies, through active sales and marketing efforts by our Real Estate Group, which was established to supervise all the real estate-related businesses in June 2006. Proceeds from these loans are primarily used by our customers as working capital for acquisition of properties for property development and/or for resale. The health of the real estate market in Japan is closely tied to larger economic trends. Thus, the value of real estate mortgaged or pledged to us by our customers could decline if Japanese economic conditions deteriorate, exposing us to significant risks. In addition, with respect to secured loans to property companies, we are also exposed to risks that our customers may not complete development projects in a timely manner or at all, resulting in the developers’ failure in their business and an inability to repay the loans to us, or that the completed property will not have the value we anticipated, resulting in lower collateral value than we expected. We may also fail to adequately evaluate or control risks associated with the loans we make, such as the creditworthiness of the borrower or development or other risks associated with the property, or we may fail to correctly value, or successfully realize the value of, the collateral. As a result, we may experience greater defaults than we anticipate or fail to recognize the amounts we anticipate upon enforcement of collateral. Environmental liabilities unknown at the time we make loans could also impair the value of properties securing our loans.

     Secured loans for property development or resale purposes are generally made for short terms and have relatively large principal amounts compared to other loans that we lend. This has increased our short-term funding requirements, which we may not be successful in meeting or accurately evaluating. This could constrain our ability to make new loans.

     Furthermore, in the event taxation regimes concerning our real estate-related businesses, including land taxation, are amended, costs of acquisition and sale of real estate may increase, and could adversely affect our real estate-related businesses.

     In addition to secured real estate finance, our direct investments in real estate have recently grown significantly. Any deterioration in market conditions in Japan’s real estate markets, including tightening of regulations with respect to real estate financing or investment, may adversely affect the value of real estate held by us as principal and our real estate-related businesses in general.

     Any or all of the above factors could have material adverse effects on our business, financial condition or results of operations.

The fair value of our strategic investments could decline due to a deterioration of the economic environment or other factors and adversely affect our financial condition

     We invest in various companies for which we believe that such investment will improve our ability to provide integrated financial services or other services and expand our business network. As of March 31, 2007, the fair value of our investment securities was ¥38,384 million, representing 8.5% of our consolidated total assets as of the same date. However, if the stock prices of these companies were to decline significantly, or if the financial condition of these companies were to worsen, for example, due to a deterioration of the economic environment, we could suffer impairment losses on these securities or our shareholders’ equity ratio could decline due to a fluctuation in unrealized profits or losses in investment securities, which could adversely affect our financial condition and results of operations.

The strategic alliances, joint ventures and strategic investments which we have entered into may not yield attractive returns and could produce losses

     We have been pursuing various strategic alliances and joint ventures with financial institutions and other finance-related companies, which include arrangements to receive customer referrals and to provide guarantees for their loans to customers. We have also in recent years increased our investments in companies that have the potential to complement our business strategically. The book value of these strategic investments was ¥28,674 million and ¥23,368 million as of March 31, 2006 and 2007, respectively.

     We expect to continue seeking strategic alliances, joint ventures and strategic investments to establish a strong business infrastructure and expand sales channels, but may not be able to successfully develop such alliances or to grow or maintain profits. These strategic alliances, joint ventures and strategic investments may not achieve profitability and we may incur impairment losses or other damage with respect to such investments.

     We may also fail to adequately evaluate or control risks associated with these investments or with loans that we guarantee as part of some of our strategic alliances, such as the creditworthiness of the borrower or other risks associated with such loans, or we may fail to correctly value, or successfully realize the value of, any collateral for loans that we guarantee. Our rights and remedies may also be more limited under our strategic alliances, joint ventures and strategic investments than when we engage in lending or other businesses directly. As a result, we may experience greater payouts on guarantees than we anticipate, fail to recognize the amounts we anticipate upon enforcement of collateral associated with loans we guarantee, or incur other damage.

     Moreover, while strategic alliances, joint ventures and strategic investments that aim at specific markets may attract our existing customers or those of our alliance partners, we may not be successful in attracting the new customers that we require in order to expand our customer base which in turn could reduce the profitability of our core business. Any or all of these factors could adversely impact our business, financial condition and results of operations.

Increasing competition in the loan servicing market in which Nissin Servicer operates could reduce our profitability

     Our subsidiary, Nissin Servicer Co., Ltd. (“Nissin Servicer”), is engaged in the purchase of specific money claims from financial institutions through a process of invited tender. An increase in the number of companies entering this market, together with the contraction in liquidity in the market for bad debts due to the economic recovery in Japan, has lead to increasingly severe competition. In response to these factors, and in order to maintain our competitiveness in the purchase of specific money claims, we are pursuing a proactive approach to financial institutions, efficient collection activities which take into consideration the customers’ revitalization efforts and profitability, and enhancement of real estate-related revitalization businesses. We believe that these activities, together with the development of new areas of business such as liquidation of assets, securitization-related and corporate revitalization-related businesses, have allowed us to maintain competitiveness in the current business environment. However, if we are unable to maintain competitiveness in the purchase of specific money claims, or if there are rapid increases in purchase prices or falls in the level of commission fees, we may be unable to purchase these loans at favorable prices or at all, and our servicing business may have decreased profitability or losses, which could adversely affect our business strategies and results of operations.

Our business in China is subject to a number of risks associated with doing business overseas and, in particular, is subject to extensive Chinese government regulation that changes frequently, and these regulations could adversely affect our business and operating results

     Our subsidiary, Nissin Leasing (China) Co., Ltd. (formerly known as Matsuyama Nissin Investment Consulting (Shanghai) Co., Ltd.; “Nissin Leasing (China)”), operates leasing, non-bank financing and other businesses in China. We aim to expand our presence in China and such expansion will require further investment of capital and management resources. Our proposed expansion also involves a number of risks associated with doing business overseas, such as difficulties in the political and/or economic relationship between Japan and China, social or economic turmoil due to social unrest, terrorism or other factors and/or general strikes and other disruptions to working conditions. Expanding our operations in China may require significantly more investment and resources than we currently anticipate, which may lead to adverse consequences for our business, results of operations and/or financial condition.

     In addition, the Chinese government has broad discretion and authority to regulate the leasing, non-bank finance and other industries in China. The Chinese government exercises significant control over financial and other markets, as well as China’s economic growth, through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting of monetary policy and provision of preferential treatment to particular industries or companies. Existing regulations or government action in China may constrain our operations, and new regulations, the readjustment of previously implemented regulations or other government action could require us to change our business operations in China, increase our costs, prevent us from repatriating profits to Japan, or limit our ability to finance or conduct activities in China.

     Furthermore, China’s commercial legal system is still under development, and even where adequate law exists in China, enforcement of laws or contracts may be uncertain and sporadic. The relative inexperience of China’s judiciary including in relation to international commercial matters creates additional uncertainty as to the outcome of any litigation, and interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. Our activities in China are subject to administrative review and approval by various national and local agencies of China’s government. As a result of the changes occurring in China’s legal and regulatory structure or otherwise, we may not be able to secure requisite governmental approval for our activities, or approvals we have received, such as the leasing license obtained by Nissin Leasing (China), may be suspended or revoked. Any of these factors could adversely affect our business, financial condition and operating results.

Any future inability to obtain funds from lenders or access the debt capital markets on favorable terms could impair our ability to extend loans to borrowers, reduce our competitiveness and the profitability of our lending and adversely affect our financial condition

     Ready access to funds on favorable terms is essential to our business. We raise funds primarily through loans from financial institutions and by issuing debt securities in the capital markets. As of March 31, 2007, the aggregate amount of our borrowings was ¥345,075 million. The difference between the interest rates we charge our customers and the interest rates we pay to our financing sources is the key factor impacting our profitability. As of March 31, 2007, our weighted period-end average contractual interest rate on outstanding loans in our loan portfolio was 13.8% per annum, while our weighted period-end average contractual interest rate for both short-term borrowings and long-term borrowings was 1.9% per annum.

     As of March 31, 2007, 75.6% of our borrowings, or ¥260,817 million, were long-term borrowings, 62.4% of our borrowings, or ¥215,357 million, came from loans from banks, non-bank financial companies, insurance companies and other financial institutions, 19.9% of our borrowings, or ¥68,840 million, came from issuances of corporate bonds and commercial paper, and 17.6% of our borrowings, or ¥60,878 million, came from other sources, including securitization of certain loans receivable. Based on their evaluations of our long-term or short-term financial prospects, any of these lenders could cease to finance our business or to offer funds on favorable terms.

     In particular, a downgrade in our credit ratings or those of similar companies or Japanese companies generally, for instance, could result in an increase in the interest rates that lenders charge us and also result in a shift in the sources for funding that we choose to access. For example, the downgrades of our debt rating by the Japan Credit Rating Agency, Ltd., or JCR, in April 2003 and December 2005, led us to curtail our debt issuances and increase our reliance on bank loans, which typically bear higher interest rates. On September 27, 2007, JCR announced that it had lowered our debt rating again, which could prevent us from issuing debt in Japan at favorable rates or at all. In addition, any negative publicity about small business or consumer finance lenders such as that seen in 1999 with respect to the unlawful or improper practices of small business lenders could also make lenders reluctant to extend credit to us or companies in our industry in general. Further, as a result of the recent decisions of the Supreme Court with respect to “gray-zone” interest rates, we have faced increasing difficulties in obtaining bank funding on favorable terms as a result of such lenders decreasing the amount of funds available to loan companies in general. In addition, the disruptions to international credit markets triggered by the recent deterioration of the subprime-mortgage market in the United States have led to widespread difficulties in international financial and capital markets, and constrained our ability to borrow or to securitize assets.

     As a result of these factors, we have recently experienced difficulty in accessing the total amount of funds that we desire for our business operations, and we expect that our cost of borrowing may increase in the short term. Moreover, as a result of the above factors and/or as a result of ongoing restructuring of the Japanese financial sector, and of regional banks in particular, our lenders may fail or adopt lending policies unfavorable to us.

     A number of other factors largely beyond our control could also impair our ability to borrow, including severe disruptions of the financial markets (such as the recent disruptions triggered by the U.S. subprime-mortgage market difficulties), negative views about the prospects for the finance industry generally or further downgrades of Japan’s sovereign debt ratings. Any impact from these factors on our capital procurement environment could increase our interest expenses. An inability to obtain sufficient funds from lenders or capital markets on favorable terms or at all could impair our ability to extend loans to borrowers or reduce our competitiveness and the volume and/or the profitability of our lending.

     Although contractual borrowing interest rates that we are required to pay are subject to fluctuations due to the market environment and other factors, the contractual lending interest rate in our loan business is subject to various restrictions under Japanese law. Therefore, in order to minimize our interest fluctuation risk, we are pursuing financing with fixed interest rates for borrowings from financial institutions and issuances of corporate bonds. As of March 31, 2007, our fixed rate borrowings, including those fixed through hedging from derivative transactions, comprised 48.4%, and our variable rate borrowings comprised 51.6%, of our total borrowings. However, we may not be able to effectively control our interest rates on borrowings. Moreover, we expect that our cost of borrowings may increase in the short term, while our average contractual interest rates on loans that we extend to our customers is decreasing, as a result of the Japanese legal and regulatory changes reducing the interest rates that we may charge to our customers and our focus on higher-quality credit customers. This in turn could reduce our net interest margins.

     Any or all of these factors could adversely affect our financial condition and results of operations.

An increase in prevailing market interest rates would increase our interest expense and thus could reduce the margins we receive on our loans to our borrowers

     Interest rates in Japan have been extremely low for several years, reflecting the Bank of Japan’s monetary policies, including the “zero interest rate” policy, which was in place for most of the period from February 1999 until it was ended in July 2006. Also, the official discount rate offered by the Bank of Japan has remained at 0.1% since September 2001 until it was increased to 0.4% in July 2006. Partly as a result of this policy, the weighted period-end average contractual interest rates on our own borrowings have been extremely low in recent years: 1.4% as of March 31, 2006 and 1.9% as of March 31, 2007 for our long-term borrowings.

     As a result of a recent change in policy by the Bank of Japan, short-term interest rates have recently risen in Japan and may continue to do so. In addition, market interest rates have risen generally as a result of the recent credit market disruptions triggered by the U.S. subprime-mortgage market difficulties. Consequently, our lenders may increase interest rates on their loans to us, and we may not be able to pass our increased interest expenses to our customers in the form of higher rates on our loans due to competitive considerations and to the legal limit in Japan on interest rates that we may charge, which will be reduced. Any increase in the interest rates our lenders charge us could thus have an adverse effect on our operating margins and profitability.

Any failure to implement our business strategies successfully will negatively impact our ability to achieve our financial targets and our management’s expectations for business growth

     Our strategies include further developing certain business areas in which we operate, including our real estate-related businesses, our China-related businesses, our investment banking business and our servicing business. Further, our strategies will require us to achieve a transformation into a comprehensive non-bank financial services provider and to continue the reinforcement of our integrated risk management capabilities and the improvement of our brand image through strengthening our approach to compliance. Achieving our strategic goals will require significant management time, finances and other resources and we may not be successful in implementing our strategies to achieve the growth or returns expected by our management. In addition, changes in the business and/or economic environments in which we aim to operate and other uncertain or unforeseen factors may make it difficult for us to achieve the targets we have set. There can be no assurance that we will be successful in meeting the quantitative or qualitative targets set out or that our management will not change such targets in the future.

Our risk management structure is based primarily upon observed historical trends in our business and the experience of our employees and we may not be able to predict future risk exposure

     With effect from April 1, 2007, we established a new risk management division with responsibility for assessing the risks involved in our business and the profitability and capital efficiency of the Group in view of such risks. Because some of our methods of managing these risks are based upon the use of observed historical trends, borrower and market behavior and other historical measures primarily through the experience of our employees, these methods may not allow us to accurately predict future risk exposures, which could be significantly greater than our historical measures indicate. This in turn could have a material adverse effect on our business, financial condition and results of operations.

Any disruption, outages, delays or other difficulties experienced by our information or technological systems and networks could adversely affect our business

     We increasingly rely on internal and external information and technological systems and networks to generate new business, provide services to customers and manage our operations. In particular, our business depends on:

	•		the ability of our automated funds transfer system to handle high volumes of phone calls and to provide customers with a convenient system which offers reliable privacy protection;
	•		the reliability and security of third-party databases from which we obtain credit information about our customers;
	•		the reliability of third-party wire transfer services which we use to disburse loans to accounts designated by our customers; and
	•		the reliability of the financial institutions that hold our customers’ accounts from which we automatically transfer their payments to us.

     In addition, we outsource a significant part of our hardware and software responsibilities, in order to manage our operating transaction and accounting data, confidential customer information and other back-office data operations. (See “Our Operations — Integrated Financial Services Segment — Technology ” in Item 4.B of this annual report on Form 20-F.)

     Our systems are vulnerable to damage or interruption from human error, natural disasters, power loss, computer hackers, computer viruses and similar events or the loss of support services from third-parties such as our systems solution providers, telephone carriers and Internet backbone service providers. Any disruption, outages, or delays or other difficulties experienced by any of these technological and information systems and networks could affect our financial condition and results of operations.

We may have to constrain our business activities to avoid being deemed an investment company under the U.S. Investment Company Act of 1940

     In general, a company which is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities may be deemed to be an investment company under the U.S. Investment Company Act of 1940 (the “Investment Company Act”). If we were to be deemed an investment company under the Investment Company Act, we would be prohibited from issuing our securities in the United States and may have to terminate the listing of our American Depositary Shares (“ADSs”) on the New York Stock Exchange or other sponsorship promoting a U.S. trading market for our issued securities. In order to avoid these prohibitions, we may be forced to forgo otherwise attractive business opportunities, potentially limiting our liquidity, growth and profitability.

Compliance with regulations on internal control could adversely affect our results of operations

     We are subject to Section 404 of the Sarbanes-Oxley Act and our co-chief executive officers and chief financial officer must include the following statements in each annual report under Section 404 of the Sarbanes-Oxley Act from the fiscal year ended March 31, 2007:

	•		a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Group;
	•		a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of the Group’s internal control over financial reporting;
	•		management’s assessment of the effectiveness of the Group’s internal control over financial reporting as of the end of the Group’s most recent fiscal year, including a statement as to whether or not the Group’s internal control over financial reporting is effective; and
	•		a statement that the registered public accounting firm that audited the financial statements included in the annual report has issued an attestation report on management’s assessment of the registrant’s internal control over financial reporting.

     Strengthening our corporate governance structure in order to comply with the Sarbanes-Oxley Act has required significant costs, as well as management attention and other corporate resources, and we expect that compliance with the Sarbanes-Oxley Act will continue to require significant costs and resources. In addition, we will be subject to regulations on internal control over financial reporting under Japanese law from the year ending March 31, 2009 and may require additional costs and resources to comply with such new Japanese regulations. These compliance costs and resource requirements may be greater than we anticipate, and focusing limited corporate resources on these compliance matters may require us to constrain our business activities, which in turn could adversely affect our financial condition or results of operations.

Misconduct by an employee or director could harm us and is difficult to detect and deter

     Our employees and directors could engage in misconduct, which includes, among other things:

	•		conduct that exceeds the authority given to the employee or director, such as approval of a transaction for which he or she does not have proper authorization;
	•		concealment of such unauthorized conduct or authorized but unsuccessful activities that cause material harm to us; and
	•		improper use or disclosure of confidential information or leakage of personal information.

     Any such misconduct by an employee or director could result in regulatory sanctions, legal liability and serious reputational or financial harm to us. We have not suffered materially from misconduct by an employee or director in the past. However, the precautions we take to prevent and detect such misconduct may not always deter or prevent it, even though we recognize compliance as one of the most significant challenges for management. Moreover, even if we succeed in managing the conduct of our own employees and directors, we may suffer reputationally or financially from misconduct by other lenders in the finance industry. This could generate an unfavorable perception of our business activities in general among potential customers, or lead to introduction of additional regulations or laws favoring borrowers that might erode our profitability, which could adversely affect our financial condition and results of operations.

Any failure to maintain the confidentiality of personal information of our customers could adversely affect our results of operations

     We keep and manage sensitive personal information obtained from our customers. If we fail to maintain the confidentiality of personal information for any reason, our results of operations could be adversely affected in a number of ways. We could be subject to lawsuits for damages from our customers if they are injured as a result of the release of their personal information. Failure to maintain the confidentiality of personal information could subject us to penalty under the Law Concerning the Protection of Personal Information of Japan (the “Personal Information Protection Law”). We could incur additional expenses associated with changing our security systems, either voluntarily or in response to administrative guidance or other regulatory initiatives from the government, or in connection with public relations campaigns designed to prevent or mitigate damage to our corporate image or reputation. Any damage to our reputation could also adversely affect our ability to retain or acquire customers or to maintain or establish strategic alliances with third-parties, or otherwise adversely affect our financial condition or results of operations.

Our chairman and his family may exercise influence over important business decisions in a way that conflicts with other shareholders’ interests

     As a result of the direct and indirect ownership of or control over our outstanding shares of common stock by Kunihiko Sakioka, the Chairman of the Board of Directors, and members of his family, who collectively beneficially own 36.0% of our outstanding shares as of March 31, 2007, Kunihiko Sakioka and his family members may collectively exercise a controlling influence over important decisions affecting our business and affairs. These decisions may involve significant corporate transactions such as a sale of any company within the Group, corporate restructuring, investment in other businesses or assets, or the terms of future financing. The interests of these shareholders in these and other matters may differ from those of other shareholders of the Company.

Because we expect our shares and ADSs will be treated as stock of a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, you may be subject to materially adverse tax consequences

     As we expect that 50% or more of our gross asset value constitutes “passive assets,” generally meaning assets not constituting part of an active trade or business under U.S. federal tax rules, we expect that our shares and ADSs will be treated as stock of a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. U.S. persons who hold our shares or ADSs, either directly or indirectly, may be subject to materially adverse U.S. federal income tax consequences upon the sale or disposition of the shares or ADSs and upon distributions with respect to the shares or ADSs to the extent the distributions are “excess distributions,” distributions in excess of a normal rate of distribution as calculated for PFICs. Gain realized on the sale or other disposition of shares or ADSs would in general be taxed as ordinary income. If you are a U.S. holder, you would be treated as if you had realized such gain and certain “excess distributions” ratably over your holding period for the shares or ADSs, and the income allocated to such prior tax years would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends that you receive from us will not be eligible for the 15% tax rate applicable to qualified dividend income if we are a PFIC either in the taxable year of the distribution or the preceding taxable year. (See “Taxation — United States Tax Considerations — Passive Foreign Investment Company Rules ” in Item 10.E of this annual report on Form 20-F.)

Holders of ADSs have fewer rights than shareholders and have to act through the depositary to exercise those rights

     The rights of shareholders under Japanese law to take actions including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to holders of record on our register of shareholders or our register of beneficial shareholders. Because the depositary, through its custodian agents, is the registered holder of the shares underlying the ADSs, an ADS holder cannot take these actions except through and to the extent permitted by the depositary. If we instruct the depository to provide ADS holders with the opportunity to vote in a timely manner, the depositary will make efforts to vote the shares underlying the ADSs as instructed by ADS holders. ADS holders, however, may not be provided with such rights on a timely basis or at all.

If you hold fewer than 100 shares, you do not have the right to vote the shares or transfer them and if you have ADSs representing fewer than 100 shares, you cannot withdraw the shares underlying the ADSs and cannot require us to purchase the underlying shares

     One hundred of our shares constitute one “unit.” A holder who owns fewer than 100 shares owns less than a whole unit. The Japanese Corporate Law restricts the rights of a shareholder who holds shares of less than a whole unit. In general, holders of shares constituting less than one unit do not have the right to vote under the unit share system. Our Articles of Incorporation also provide that no share certificates will be issued with respect to any number of shares constituting less than one unit. As the transfer of shares normally requires delivery of share certificates, any fraction of one unit for which no share certificates are issued is non-transferable. Furthermore, under the unit share system, holders of shares constituting less than one unit have the right to require us to purchase their shares. However, holders of ADSs that represent other than multiples of a whole unit cannot withdraw the underlying shares representing less than one unit and, therefore, they will be unable to exercise the right to require us to purchase the underlying shares. As a result, holders of ADSs representing shares in lots of less than one unit will not have access to the Japanese markets to sell their shares through the withdrawal mechanism. (See “Memorandum and Articles of Association — Limitations Affecting Security Holders — Japanese Unit Share System ” in Item 10.B of this annual report on Form 20-F.)

Item 4. Information on the Company

A. History and Development of the Company.

          The Company was established in 1960 in Matsuyama, Ehime Prefecture in the northern part of the island of Shikoku (one of Japan’s four major islands) as a joint stock corporation under the laws of Japan. Our first business was dealing in discount commercial bills. We widened our business activities by extending operations to real estate-secured loans in 1967 and consumer loans in 1972, and became a registered moneylender under the Moneylending Business Law in 1984. We created loan products with the aim of better meeting our customers’ needs at different stages of their business development, such as “Small Business Owner loans” (currently “Business Assist loans”) in 1981, “Wide loans” (currently “Smart Assist loans”) in 1990 and “Business Timely loans” in 2000. We steadily expanded our areas of operation by opening offices in Hiroshima in 1988, Osaka in 1990, Kyushu in 1992, Tokyo in 1994, and Nagoya, Sendai, Hokkaido and Shizuoka in 1995. In 1998, we adopted a dual head-office system, with one head office in Tokyo, through which our operations are primarily managed, and the other in Matsuyama. As of March 31, 2007, we had 35 loan offices throughout Japan. In recent years, we have also expanded our customer base through strategic alliances with banks, consumer finance, leasing and other financial services companies.

          In July 2001, we established Nissin Servicer to acquire and service non-performing assets of banks and other financial institutions. Nissin Servicer has listed its stock on the Mothers market of the Tokyo Stock Exchange and was Japan’s first loan servicing company to become a public company.

          In November 2003, we established NIS Lease Co., Ltd. (“NIS Lease”) to commence finance and operating lease operations in Japan.

          In June 2004, NIS Property Co., Ltd. (“NIS Property”) was renamed from a subsidiary previously established by us and commenced real estate-related businesses operations in Japan.

          In June 2004, we sold most of the outstanding balance of our unguaranteed consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) in line with our strategic shift to operate our traditional consumer loan business on a substantially reduced scale.

          In July 2004, we established Matsuyama Nissin Investment Consulting (Shanghai) Co., Ltd. (currently Nissin Leasing (China) Co., Ltd.) to commence arrangement of investments and other businesses such as providing market research services and assistance to Japanese companies planning to establish a presence in China, as well as to operate a real estate agency and a leasing business in China.

          In December 2004, we acquired 100% of the outstanding shares (99.5% as of March 31, 2007) of Yamagen Securities Co., Ltd. (currently NIS Securities Co., Ltd.; “NIS Securities”) to commence securities and investment banking business operations in Japan.

          In September 2005, Nissin Leasing (China) obtained a leasing license from the Chinese authorities and began operating full-scale leasing business in China.

          In December 2005, we acquired 69.3% of the outstanding shares of APREK Co., Ltd. (“APREK”) to enhance provision of financial services to owners of SMEs in Japan’s Kyushu region.

          With effect from October 2006, we changed our name to NIS Group Co., Ltd.

          In December 2006, we acquired 37.5% of the outstanding shares of Araigumi Co., Ltd. (“Araigumi”), currently an affiliate accounted for under the equity method, through a subscription to a third-party allotment of new shares, in order to mutually cooperate and promote services in the field of real estate investment, real estate development and construction-related businesses.

          In April 2007, we established the Investment Banking Department, and in May 2007, we established NI Strategic Partners Co., Ltd. (“NI Strategic Partners”), to enhance our investment banking businesses, such as support services for corporate real estate transactions, mergers and acquisitions (M&A), management buyouts (MBOs) and leveraged buyouts (LBOs).

          Our principal executive office is located at Shinjuku L-Tower 25F, 6-1, Nishi Shinjuku 1-chome, Shinjuku-ku, Tokyo 163-1525, Japan, and its phone number is +81-3-3348-2424. Our principal Internet website is http://www.nisgroup.jp. Information on this website does not form part of this annual report on Form 20-F.

          Information about our principal capital expenditures and divestitures is provided in Item 5.B of this annual report on Form 20-F.

B. Business Overview.

Overview

          We provide integrated financial services to SMEs and their owners in Japan, tailored to their stages of development and particular needs. We provide our services both directly and through alliances and joint ventures with other companies including financial institutions. We also service distressed loans purchased from third-parties and engage in leasing and related businesses in Japan, as well as investment banking, securities and principal investment businesses. In addition, we also engage in real estate-related businesses, including providing secured loans to property companies and principal investment in real estate. In recent years, we have commenced leasing and other operations in China. We currently report our business activities in accordance with the following four business segments:

	•		integrated financial services;
	•		servicing business;
	•		real estate business; and
	•		other businesses.
	For the year ended March 31, 2007, our operating income was ¥1,321 million and our net losses were ¥1,610 million.

Our Strategies

      Transform from a Mono-line Lending Business into an Integrated Financial Business

          We seek to further diversify our business lines in order to better meet the broader needs of SMEs, while we continue to position the lending business as our principal business. We aim to gradually decrease our relatively high dependence on interest income by diversifying revenue sources, and to increase the proportion of revenue from fee businesses. In line with this strategy, we intend to focus on real estate-related businesses (including real estate investment and real estate secured loans), investment banking, securities and venture capital businesses, servicing business and businesses in China. We believe that the diversification of our business lines will contribute to securing stable revenues as well as to minimizing the impact of business and/or market-specific risks.

      Provide Integrated Financial Services to SMEs in Japan

          We seek to provide a broad range of integrated financial services to SMEs in Japan and their owners. These services include the following:

	•		Broad Range of Services to SMEs . We provide a variety of financial services to SMEs, depending on their growth stage, in an effort to be our customer’s primary source for financial services. In addition to SME loans, we provide leasing and other services, including secured loans.
	•		Services to SME Owners. For SME owners, we provide SME loans (described in “Our Operations” below), as well as installment credit. We seek to customize our products to the needs of SME owners. For example, we may extend loans to the owner’s business directly, with a guarantee from the owner or a third-party, or secure such loans if appropriate collateral is available.

          In addition to our direct channels, we also seek to provide our services through alliances and joint ventures with other financial service companies. We apply our credit expertise as a lender to SMEs and their owners to take advantage of our alliance companies’ customer bases and established brand values to more effectively offer our products and services, as well as to develop new products for these customers. Depending on the alliance, we market these products under our own or our allied brands.

      Expand Real Estate-related Businesses

          We have recently experienced significant growth in our real estate-related businesses whereby our real estate assets have increased approximately threefold in March 31, 2007 compared to March 31, 2006. We have additionally achieved a significant increase in revenues from real estate investment. We seek to continue expanding our real estate-related businesses in Japan in order to take advantage of our credit and secured lending expertise in Japan’s real estate markets. We believe that the recent stabilization or increase of asset values in major real estate markets in Japan, particularly major urban areas such as Tokyo, provides an opportunity for secured real estate financing and principal investment in real estate. We seek to leverage our credit and secured lending expertise in relation to SMEs, as well as our experience in servicing distressed loans, to grow various real estate-related businesses, including the following:

	•		Providing real estate secured loans to property companies for working capital. This is currently our fastest growing business line, and we focus primarily on small to medium-sized property companies, which develop small commercial and residential properties or resell such properties that they purchase. In addition, we established the Real Estate Structured Finance Department in September 2006, and started providing non-recourse loans, which generally carried larger loan principal, mainly to special purpose companies for real estate-related projects.
	•		Investing in real property with a view to resale. We seek to purchase real estate, particularly commercial as well as residential rental properties, that we believe can be operated for profit or resold at a higher price following renovations of the property or improvements in property management. We conduct this business primarily through NIS Property.
	•		Acquisition of distressed real estate. Taking advantage of our network of financial institutions selling distressed loans collateralized by real estate and our experience in servicing such loans, we seek to acquire distressed real estate assets that we believe can be restructured and resold at a higher price. We conduct this business through Nissin Servicer.

          While we endeavor to expand our real estate-related businesses, we also intend to strengthen our risk management in relation to real estate-related businesses.

      Develop Servicing Business

          We have been increasing revenues from our servicing business, of which revenues from sales of real estate purchased through our servicing business have significantly increased for the year ended March 31, 2007 compared to the previous fiscal year. We seek to continue to grow our servicing business in Japan by expanding into new business areas and customer bases as well as further developing the existing businesses, such as servicing of unsecured loans and real estate-related loans, and revitalization-related businesses.

      Develop Overseas Business, Particularly in China

          We seek to expand our full-scale leasing business in China, which we operate through Nissin Leasing (China). We believe that economic and commercial growth in China has created a demand for sophisticated leasing and other financial services, particularly among growing enterprises. Through Nissin Leasing (China), we seek to become one of China’s premier leasing companies. We also seek to use our financial expertise and experience in operating a large-scale business in China to provide consulting services for companies looking to conduct business in China, and to provide trading, factoring and other integrated financial services in China.

      Develop Investment Banking, Securities and Venture Capital Business

          Through NIS Securities, we provide investment banking services targeted at SMEs in Japan, including the arrangement of financing in the capital markets, initial public offerings and other financial advisory services. We seek to take advantage of our network of relationships with SMEs to provide customized investment banking services tailored to their stages of growth. We also seek to expand our proprietary trading and brokerage services.

          In addition, we believe that attractive principal investment opportunities, including equity investments and financing through leveraged buyouts and management buyouts, exist with many of our financial services clients, which are SMEs in relatively early stages of their growth. With NI Strategic Partners and our Investment Banking Department, we seek to take advantage of our network of relationships with such companies to make proprietary venture capital investments in growth enterprises with a view to capital gain. We believe such principal investments may also lead to other investment banking opportunities.

          In this manner, we seek to integrate investment banking, securities and venture capital businesses into our overall package of integrated financial services that we offer to SMEs and their owners in Japan.

Our Markets

          We provide integrated financial services to SMEs and their owners in Japan, tailored to their stages of development and particular needs. In recent years, we have also commenced leasing and other operations in China. Below is a summary of the major industries in which we operate.

      Integrated Financial Services

           Japanese SME Finance Industry. We operate in the Japanese small business finance industry, which provides secured or unsecured loans to SMEs and their owners. Many of our loan products are extended principally to individuals who own SMEs on the basis of individual creditworthiness, rather than to entities based upon business creditworthiness, which is the focus of general business finance companies. However, to the extent that we provide loans to SMEs as well as their owners, we compete with lenders in the business finance industry that loan to SMEs.

           Japanese Real Estate Finance Industry. We operate in the Japanese real estate finance industry, which provides secured loans for the purpose of financing the purchase or development of real estate. Our secured loans are generally provided to small and medium-sized property companies as working capital for the purpose of acquiring properties for resale and/or developing small commercial and residential properties. Real estate finance to property companies is one of our largest growth businesses and a strategic focus for us. We also provide secured general-purpose loans to individual customers.

           Japanese Leasing Industry. Through our subsidiary, NIS Lease, we compete in the Japanese leasing industry, which provides finance and operating lease products and services to customers in Japan. Our target market is SMEs in Japan. We therefore compete with other leasing and non-bank finance companies that provide services to such companies.

           Chinese Leasing and Other Industries. We operate in the Chinese leasing market through Nissin Leasing (China). We have also been expanding, and will continue to expand, into other markets in China and have begun engaging in consultancy services, import and export services and factoring businesses through subsidiaries of Nissin Leasing (China).

           Japanese Consumer Finance Industry. We operate in the Japanese consumer finance industry, which provides mainly unsecured loans without restrictions on the purpose of use to individuals in Japan. We compete with traditional consumer finance companies, as well as banks and credit finance companies outside the consumer finance industry which have started in recent years to provide loan products similar to ours for consumers seeking to consolidate loans from multiple lenders.

           Japanese Investment Banking and Securities Industries. Through our subsidiary NIS Securities and NI Strategic Partners as well as our Investment Banking Department, we operate in the Japanese investment banking and securities industries. Japan has sophisticated financial markets and we compete with Japanese and foreign investment banks to provide investment banking and securities services to SMEs. We also operate a principal investment business in Japan. We focus on SME markets in Japan in order to take advantage of our expertise and relationships with SMEs that we have developed mainly through our traditional financial services.

      Servicing Business

           Japanese Loan Servicing Industry. We operate in the Japanese loan servicing industry through our subsidiary, Nissin Servicer. We are primarily focusing on collection activities in a manner that takes into consideration our customers’ revitalization efforts and profitability, and the enhancement of real estate-related businesses. In addition, we are developing new areas of business under this business segment, such as liquidation of assets, and securitization-related and corporate revitalization-related businesses. The Japanese loan servicing industry has grown rapidly in the last few years due to the accelerated disposal of non-performing loans by Japanese financial institutions as a result of Japanese government measures to combat non-performing loans. We compete with a variety of companies for loan servicing opportunities and, in particular, we consider affiliated companies of the major consumer finance or SME loan companies to be our primary competitors. According to the Ministry of Justice, as of December 31, 2006, 96 companies were registered as licensed servicing companies, of which we believe 13 were affiliated with major consumer finance or SME loan companies.

      Real Estate Business

           Japanese Real Estate Industry. We conduct integrated real estate businesses in Japan, with a primary focus on real estate located in Tokyo, Osaka and other major cities. In our real estate renovation business, we purchase commercial properties and increase tenant occupancy rates through renovations to improve cash flows, resulting in resale of the properties at higher prices. We also retain some of these properties to obtain stable cash flows. Real estate development is another major focus of our real estate business. While competition to acquire land for development has been increasing recently in Japan, we believe that we have the ability to successfully compete for small to medium-sized development projects including development of commercial properties, where competition is, to a certain extent, less intense. We believe that our value-creating real estate business model provides us with a strong competitive factor in the recently growing real estate business in Japan.

Our Operations

          From the fiscal year ended March 31, 2007, we reclassified the way we report our business segments into the following four business segments:

	•		integrated financial services;
	•		servicing business;
	•		real estate business; and
	•		other businesses.

          Our integrated financial services segment includes the provision of loan products, such as “secured loans,” “Business Assist loans,” “Business Timely loans,” “Smart Assist loans” and “First Plan loans,” to individuals and SMEs, as well as the provision of credit guarantees and leasing and securities business.

          In our servicing business segment, we mainly acquire for our own portfolio and service non-performing debts from banks and other financial institutions in Japan, as well as invest in real estate properties acquired in connection with the disposal of non-performing loans by financial institutions.

          Our real estate business segment, which was previously included in our other businesses segment, is now disclosed as a separate business segment, from the year ended March 31, 2007, due to its increased significance in our business. In this business segment, we invest in, develop and manage real estate properties as well as conduct asset management business.

          Operations in our other businesses segment include a consultancy business for business owners, an insurance agency business, and other businesses.

      Integrated Financial Services Segment

          Our net interest income from lending activities in the integrated financial services was ¥18,568 million, ¥17,970 million and ¥6,319 million for the years ended March 31, 2005, 2006 and 2007, respectively. Operating income from the integrated financial services segment was ¥6,542 million, or 80.4% of our consolidated operating income for the year ended March 31, 2005, and ¥7,426 million, or 63.6% of our consolidated operating income for the year ended March 31, 2006. We had ¥4,108 million of operating losses from the integrated financial services segment for the year ended March 31, 2007.

          The following tables provide the balance of loans outstanding for each category of our loan products as of the end of each fiscal year shown and the average balance of loans outstanding for each category of our loan products during each fiscal year shown:

          Recent changes in the laws, regulations and judicial interpretations affecting the moneylending business in Japan have affected the rates of interest that we charge on loans that we extend to our customers. See “Regulation” below for a discussion of the laws, regulations and judicial interpretations affecting our business. Taking into consideration the regulatory environment in the moneylending industry, as well as our intention to diversify our business and accelerate our alliance strategy partly by targeting lower interest rate loans to higher quality customers, we lowered the maximum interest rates we charge with respect to all loan products originated on or after October 1, 2006. In general, interest rates for all loan products will be 15% or less for loans in a principal amount of ¥5 million or more and 18% or less for loans in a principal amount of less than ¥5 million.

           Secured Loans

          Secured loans comprised 51.6% of our total balance of loans outstanding as of March 31, 2007. Secured loans represented our growing loan product during the year ended March 31, 2007, with growth of 52.5% in secured loans outstanding during this period. Secured loans are primarily loans made to property companies that are secured by real property. Also, we make secured loans to individuals and SMEs in Japan that are secured by real estate or securities, in many cases as consolidation loans for customers who do not qualify for our unsecured Smart Assist loans. In addition, we commenced providing non-recourse loans through the Real Estate Structured Finance Department. Loans to property companies for the purpose of property development or acquisition of properties for resale represented a significant majority of our secured loans as of March 31, 2007 and are the strategic focus of our secured loan business. Our gross interest income from secured loans significantly increased to ¥7,818 million in the year ended March 31, 2007 from ¥2,886 million in the year ended March 31, 2006. In addition, we achieved a charge-off ratio of 0.02% for secured loans for the year ended March 31, 2007.

           Secured Loans to Property Companies. We established our Real Estate Finance Department in February 2004 in order to focus on loans designed for property companies secured by real property. In addition, we established the Real Estate Structured Finance Department in September 2006 to provide real estate-related services particularly for securitization, including non-recourse loans, loan arrangement and other services. These loans have grown significantly in the last three fiscal years from a balance of ¥7,433 million as of March 31, 2004 to ¥97,260 million as of March 31, 2007. These loans are primarily used as working capital for the development of small commercial or residential buildings by property companies. Our primary customers for secured loans are small to medium-sized property companies in Japan. We determine the interest rates for these loans on an individual basis, and the weighted period-end average interest rate on secured loans to property companies at March 31, 2007 was 7.5% per year. We also generally charge an up-front origination fee of typically around 2% on each of these loans. These loans have a high degree of liquidity and typically mature in a period ranging from 1 month to 2 years. The average maturity of secured loans to property companies as of March 31, 2007 was 0.6 years.

          The following table shows the total number of accounts, the balance of loans outstanding, and the average balance of loans per account with respect to secured loans to property companies:

          The following table shows advances of secured loans, recognized on the disbursement date, to property companies:

		Year Ended March 31,
		2003				2004				2005				2006				2007
									(In millions)
Advances		¥	—			¥	10,397			¥	18,716			¥	72,587			¥	167,895

          Unlike many of our other loans, the principal amounts of secured loans made to property companies are generally relatively large. This is because these loans are used for property acquisition or development, typically in Tokyo or other large urban areas in Japan, where land prices and development costs are relatively high. During the fiscal year ended March 31, 2007, the average principal amount of our new secured loans to property companies per account was ¥308 million. As a result, we are subject to the risk that declines in real estate values, and in turn the value of our collateral for such loans, could subject us to significant unsecured risk on these loans.

           Secured Loans to Individuals and SMEs. Our secured loans to individuals and SMEs are typically general purpose loans secured by real property or securities. Many of our customers for these loans do not qualify for our unsecured Smart Assist loans or other consumer loans. Our customers for these loans often have other outstanding secured loans, and we make loans secured by second mortgages over the customer’s property in amounts generally based on the market value of the mortgaged property in excess of the outstanding balances of other loans to that customer secured with such property. The weighted period-end average interest rate on secured loans to individuals and SMEs as of March 31, 2007 was 7.1% per year. We also generally charge an up-front origination fee of typically around 2%, and no greater than 5%, on each of these loans. The average maturity of secured loans to individuals and SMEs as March 31, 2007 was 1.6 years.

           SME Loans

          Our SME loans comprised 30.1% of our total balance of loans outstanding as of March 31, 2007. SME loans consist mainly of Business Assist loans (formerly called “Small Business Owner loans”) and Business Timely loans. Business Assist loans are, in general, guaranteed, unsecured loans of up to ¥30 million in principal amount that require one or more guarantees from individuals with an income source that is separate from that of the borrower. Business Timely loans are unguaranteed, unsecured loans made under pre-approved revolving credit lines to more creditworthy SME owners. We do not restrict the use of proceeds from SME loans. We believe that customers generally use the proceeds of SME loans to obtain working capital for their businesses or to repay existing loans.

          SME loans are generally contracted at a fixed interest rate of up to 18% per year and payable monthly. Customers may prepay their SME loans at any time without penalty.

          For Business Assist loans, we charge an up-front origination fee of basically around 2%, and no greater than 5%, for each loan at the time of cash disbursement. These loans have initial repayment terms of up to 7 years and 2 months. The average maturity of our Business Assist loans at March 31, 2007 was 2.7 years. Under normal circumstances, we do not extend additional credit to Business Assist loan customers until they pay off their existing Business Assist loans.

          Business Timely loans are our unguaranteed, unsecured loans to SME owners under pre-approved revolving credit lines. A Business Timely loan contract is automatically renewed after three years. However, the credit line is forfeited under certain conditions such as a delinquent loan for 16 days or more. We generally conduct a credit assessment of an account holder every three months, and may terminate the account for a number of reasons. Business Timely Cards are issued to customers who enter into a Business Timely loan contract, under which they may borrow unguaranteed and unsecured Business Timely loans of up to ¥4.99 million. As a general rule, a customer seeking to enter into a Business Timely loan contract may have loans outstanding from only up to two other companies at the time of application. Of customers who entered into a Business Timely loan contract, 46.4% had outstanding balances as of March 31, 2007.

          In contrast to other lenders in Japan that target corporations and other business entities, we serve almost entirely self-employed individuals, primarily individual SME owners in a wide range of industries, through our SME loans. As of March 31, 2007, a significant portion of the borrowers of SME loans were self-employed individuals in wholesale, retail and restaurant businesses, while the remaining borrowers were primarily self-employed individuals in industries such as manufacturing, construction, transportation, communication, agriculture, fishery and other services. Our loan process for Business Assist loans often begins when staff at our general branches or loan offices call a prospective customer to determine the loan amount to be applied for, followed by a credit check. Our staff then hold a face-to-face meeting with the customer and the guarantor to ensure that all parties understand the content and implications of the loan agreement. We market Business Timely loans to more creditworthy SME owners from whom we do not require a guarantor.

          The following table shows the total number of SME loan accounts and the balance of SME loans per account:

          The following table shows advances on a contractual basis, recognized on the disbursement date, to our customers of SME loans:

          We do not make additional advances under existing Business Assist loan contracts. The majority of advances of Business Assist loans are to new customers, with the balance being made to existing customers under new contracts.

           Consumer Loans

          Consumer loans consist primarily of debt-consolidation loans to individuals who are indebted to multiple lenders, which we refer to as Smart Assist loans (formerly called “Wide loans”). Consumer loans comprised 12.9% of our total balance of loans outstanding as of March 31, 2007. Our balances of consumer loans have declined both in absolute amounts and as a percentage of total loans outstanding in recent fiscal years, primarily as a result of the growth of our secured loan and business owner loan products and our sales and marketing emphasis in such areas.

          We extend Smart Assist loans of up to ¥10 million at a fixed contractual interest rate of no greater than 18% per year. In addition, we charge an up-front origination fee of no greater than 3% at the time of disbursement. The loans are repaid in equal monthly payments, comprising both interest and principal, over a period of up to 10 years and 2 months. The average maturity of Smart Assist loans as of March 31, 2007 was 3.4 years. The borrower must supply one or more guarantors with an income source separate from that of the borrower. We require the proceeds from these loans to be applied to the consolidation of loans from other consumer finance companies. Under normal circumstances we do not extend additional credit to Smart Assist loan customers until they pay off their existing Smart Assist loan contracts.

          The following table provides information on the total number of Smart Assist loan accounts and the balance of Smart Assist loans per account:

          The following table shows advances on a contractual basis, recognized on the disbursement date, to our customers of Smart Assist loans:

		Year Ended March 31,
		2003				2004				2005				2006				2007
		(In millions)
Advances		¥	34,294			¥	20,709			¥	15,897			¥	14,977			¥	10,494

          We do not make additional advances under existing Smart Assist loan contracts. Almost all advances of Smart Assist loans are to new Smart Assist loan customers, with the balance being made to existing Smart Assist loan customers under new contracts.

          In recent years, we have increasingly shifted our resources away from our consumer loan business because of competition from the major consumer finance companies, which benefit significantly from the scale of their consumer loan operations. In line with this strategic shift, on June 1, 2004, we sold most of the outstanding balance of our consumer loans other than Smart Assist loans (comprising mainly unguaranteed consumer loans) to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) for ¥32,697 million. These other consumer loans are no longer material to our business, and we expect that they will continue to decrease. As of March 31, 2007, the total balance of consumer loans outstanding other than Smart Assist loans was ¥2,212 million, representing only 0.8% of our total balance of loans outstanding.

           Other Loans

          Other loans comprised 5.4% of our total balance of loans outstanding as of March 31, 2007 and 4.7% of our total average loans outstanding for the year ended March 31, 2007. The average maturity of other loans as of March 31, 2007 was 4.1 years. These loans mainly consist of direct financing leases and installment loans to SMEs through our wholly-owned subsidiary, NIS Lease, in order to meet capital needs of SMEs in Japan to expand their businesses.

           Leasing

          Our leasing business is a key growth business and we are also strengthening our leasing business in China. In July 2004, we established Nissin Leasing (China), which obtained a leasing license from the Chinese government and began operating a full-scale leasing business in China in September 2005. With the Company providing the necessary funding and capital, Nissin Leasing (China) provides operating leases, finance leases and services for offices and commercial facilities in China. Nissin Leasing (China) also engages in the consulting business with respect to Chinese incorporation procedures, credit investigations and product test marketing.

           Other Products and Services

           Credit Guarantee. We guarantee loans to customers of third-party lenders for which we receive guarantee fees. We provide credit-guarantee services, including for third-party loan transactions, to customers of several third-parties, including Chuo Mitsui Finance Service Co., Ltd. (“Chuo Mitsui Finance”), our former affiliate, Shinsei Business Finance Co., Ltd. (“Shinsei Business Finance”), our former affiliate, and Sanyo Club Co., Ltd. (“Sanyo Club”).

           Investment Banking, Securities and Venture Capital Business. In December 2004, we started investment banking and securities business through the acquisition of current NIS Securities, which provides investment banking services. We seek to take advantage of our network established through existing customers as well as those customers of our business alliances. As these businesses grow, we believe that we can take advantage of our knowledge gained through lending in this market to provide investment banking and securities services to emerging companies, such as the arrangement of financing, initial public offerings, securities brokerage and listings on exchanges and other financial advisory, asset financing and asset management services. In December 2005, we completed our first transaction as lead underwriter in an initial public offering with the listing of Gamepot Inc. on the Ambitious market of the Sapporo Securities Exchange. NIS Securities also engages in trading for its own account, realizing trading profits of ¥60 million in the fiscal year ended March 31, 2007.

          In addition, we established our Investment Banking Department and NI Strategic Partners which engage in principal investment activities, focusing on growing enterprises and promoting support services for real estate transactions, and mergers and acquisitions, as well as financing through leveraged buyouts and management buyouts. During the year ended March 31, 2007, we invested ¥35,984 million in 227 companies of which ¥16,938 million was invested in 25 listed companies, ¥16,215 million was invested in 193 non-listed companies and ¥2,831 million was invested in 9 of our affiliates. We seek principal investment opportunities primarily through our network of relationships with SMEs in Japan.

           Opening of Loan Accounts

          Effective screening and approval of loan applicants and guarantors are critical factors in the success of our business. The application procedures for loans we extend focus principally on confirmation through an interview of the identity and credit capacity of the customer and, if relevant, the guarantor. A new customer or guarantor must first provide proof of identity, date of birth, address, place of work, length and nature of employment, family situation, existing borrowings from other lenders, and other details. To establish their credit standing, we check the customer information and, if relevant, guarantor information against our proprietary database and also check the customer information against other databases. One such database is maintained by numerous credit information centers solely for use by consumer and small business finance companies, sales finance companies and credit sales companies. These credit information centers for consumer and small business finance companies record all transactions on a real-time basis. Participating companies are required to provide customer credit information on an ongoing basis. Another database with information on delinquent loans is shared by moneylenders, banks and installment sales finance companies.

          For secured loans, we principally provide loans backed by real estate to property companies. The terms and conditions of these loans are heavily negotiated. To determine the creditworthiness of a potential customer, we examine various factors including publicly available information (such as its financial statements) and the value and quality of the real estate to be secured. We also consider whether the potential customer has a concrete business plan.

          Loan approvals for Business Assist loans, Business Timely loans and Smart Assist loans depend on both telephone and face-to-face interviews. The staff in the local loan office, a loan office manager and our credit screening department review the information provided by applicants for Business Assist loans, Business Timely loans and Smart Assist loans. The credit screening department reviews and makes a decision based on the information relating to the customer and, if applicable, the guarantor forwarded by the loan office after it completes its check. The information we examine may include information about the applicant’s employer or business including its registration and financial information.

          To determine the creditworthiness of potential borrowers, we examine a combination of factors including their history of borrowings, employment, and outstanding loans, particularly those that are secured.

          For Business Assist loans and Smart Assist loans, within two or three business days from a successful initial application, the staff at the local loan office normally visit the applicant and the guarantor to execute the loan and guarantee agreements and to discuss the consequences of the guarantee provision to ensure that both the applicant and the guarantor know the purpose of the loan and the obligations they separately incur. We have never used blanket guarantees, a practice for which some small business lenders came under widespread social criticism in 1999. A blanket guarantee holds the guarantors liable for all current and future loans of the borrower, even those of which the guarantor is not aware.

          For Business Timely loans, a credit line is established immediately following a successful application. We generally conduct a credit assessment of an account holder every three months. This credit assessment is conducted based on a credit reference on each customer from a credit information center for consumer and small business finance companies. This credit reference, together with our own data, helps us to maintain the customer’s credit level at what we believe is an appropriate level. We may terminate the account for a number of reasons.

           Collection

          If a borrower fails to make a timely repayment, the loan office that holds the loan account has initial responsibility for collection of any overdue repayment. Overdue balances on loans accrue interest at a penalty rate of up to 29.2% per year depending on loan products. We have the right in case of non-payment of a loan installment or any other specified event of default to accelerate the maturity of the loan only if the borrower fails to repay the interest portion within the maximum rate set forth in the Interest Rate Restriction Law. Under loan agreements that we have used from July 1, 2006, non-payment of “gray-zone” interest (which is interest in excess of the maximum rate set forth in the Interest Rate Restriction Law) generally does not trigger acceleration. From the first day of delinquency, our computer system produces automatic daily reports on overdue repayment. Then, loan office personnel attempt to contact the customer by telephone and, if applicable, the guarantor. Most delinquent customers pay their overdue balances shortly after this notice. When initial collection efforts fail, loan office personnel continue their collection efforts, and if necessary, we transfer the loan collection responsibility to our legal section for collection.

          Each loan office is in charge of collection efforts for a loan account until it is deemed to be a bad loan account. A loan account becomes bad when the borrower has deceased or become bankrupt, or a legal proceeding has begun to recover the loan or in the following cases:

	•		In the case of a secured loan, Business Assist loan or Smart Assist loan, when interest payments are delinquent for 44 days;
	•		In the case of a Business Timely loan, when contractual payments are past due for 7 days; and
	•		In the case of a consumer loan, when interest payments are delinquent for 67 days.

          We transfer all bad loan accounts to our Research Group, which then takes on the collection responsibility. When we choose to provide an allowance, the Research Group continues to examine the possibility of collection and compile information with which to determine whether or not to charge-off the debts. See “Allowance for Loan Losses, Reserve for Losses on Excess Interest Repayments, and Loan Charge-offs” in Item 5.A of this annual report on Form 20-F for discussion of the determination of our allowance for loan losses.

          Since February 2004, we began extending real estate financing to property companies mainly through our Real Estate Finance Department. Although the amount of these real estate-backed loans has grown significantly, the charge-off ratio was only 0.02% for the year ended March 31, 2007. Collection responsibility is, in principle, held by the loan office that holds the loan account. However, in October 2006, the Company established its Central Credit Management Section in the Company’s Research Group, which specializes in monitoring and collecting secured loans and loans with an outstanding balance of more than ¥10 million, to enhance the promptness and effectiveness of responses to collections of large debts of the Company.

           Technology

           Branch and Office Network. The application and e-mail servers in our branches and offices are connected through dedicated lines. We outsource maintenance and operation of the networks to an affiliate of NEC Corporation (“NEC”).

           Customer Information. An outsourcing center in Matsuyama houses our main computer, which stores all customer information. Our main computer stores information for approximately 2.7 million customers and can store information for up to approximately 4 million customers. Transaction data is transferred to our main computer in real time. We outsource maintenance and operation of the main computer to another affiliate of NEC. Although we make back-up copies of our data on a daily basis, we do not maintain a back-up system that can immediately replace our main computer in the event our main computer becomes inoperative.

           Loan Disbursements. We wire loan funds to accounts designated by borrowers, using wire transfer services provided by Sanyo Financial Technology. Unlike many of our competitors, we do not use proprietary automated loan machines to disburse loans, in order to minimize our physical infrastructure. Until May 31, 2004, we disbursed loans through ATMs operated by third-parties such as local and regional banks with whom we had entered into access agreements. On May 31, 2004, we ceased all arrangements to use these ATMs. As a result, we now rely on bank accounts designated by borrowers to disburse cash, in addition to cash disbursement at our loan offices.

      Servicing Business Segment

          Our operating revenues from the servicing business segment were ¥3,893 million, or 12.0% of our consolidated operating revenues for the year ended March 31, 2005, ¥7,918 million, or 20.9% of our consolidated operating revenues for the year ended March 31, 2006, and ¥10,375 million, or 26.9% of our consolidated operating revenues for the year ended March 31, 2007. Operating income from the servicing business segment was ¥1,738 million, or 21.4% of our consolidated operating income for the year ended March 31, 2005, ¥4,648 million, or 39.8% of our consolidated operating income for the year ended March 31, 2006, and ¥5,198 million, or 393.5% of our consolidated operating income for the year end March 31, 2007.

          The following table shows information on the operating assets for the servicing business segment as of the end of each fiscal year:

           Real Estate for Sale

          In addition to our loan purchasing operations, we acquire real properties in connection with disposal by financial institutions of non-performing loans. In addition, we provide our customers with services in connection with the real properties that secure our customers’ loans, such as loan revaluation services and purchase plans, with a view to increasing their property market value as well as re-negotiating terms of repayment, which we believe will assist our customers’ corporate revitalization plans and increase our revenue from our servicing business.

      Real Estate Business Segment

          Our operating revenues from the real estate business segment were ¥18 million, or 0.1% of our consolidated operating revenues for the year ended March 31, 2005, ¥901 million, or 2.4% of our consolidated operating revenues for the year ended March 31, 2006, and ¥5,307 million, or 13.7% of our consolidated operating revenues for the year ended March 31, 2007. Operating losses from the real estate business segment were ¥130 million for the year ended March 31, 2005. Operating income from the real estate business segment was ¥250 million, or 2.1% of our consolidated operating income for the year ended March 31, 2006, and ¥3,499 million, or 264.9% of our consolidated operating income for the year ended March 31, 2007.

          We purchase, renovate and develop primarily commercial as well as residential real estate in Japan to operate for profit and for resale. We conduct this business mainly through our wholly-owned subsidiary, NIS Property, as well as through our other consolidated subsidiaries. We target real estate predominantly in the greater Tokyo metropolitan area, as well as other major metropolitan areas in Japan, such as the greater Osaka area.

          As of March 31, 2007, our real estate for sale and real estate under construction for sale had a net book value of ¥26,599 million, an increase of ¥17,492 million, or 192.1%, compared with the end of the previous fiscal year. This property consisted of 31 commercial properties and 2 residential properties.

          The following table sets forth real estate for sale and real estate under construction for sale in the real estate business by property type in terms of number of properties and asset book value as of March 31, 2007:

          We operate our real estate businesses in collaboration with other group businesses. We seek to take advantage of our network of relationships with SMEs and allied companies in Japan and information we receive from our group companies. In particular, we take advantage of the networks of Nissin Servicer with respect to our real estate-related servicing business, NIS Lease with respect to our leasing business and our Real Estate Group with respect to our secured loan business. We seek to obtain information from these companies regarding potential acquisitions of properties that meet our investment criteria. In addition, we believe that our expertise in real estate-related servicing business, leasing and secured lending supports our ability to effectively manage our property portfolio. We also believe that the ability of our group companies to support our real estate business through financing, leasing and other activities gives us an advantage in the development, renovation, operation and sale of real estate.

      Other Businesses Segment

          Our other businesses segment includes business owner support services, such as an agency business for life or non-life insurance companies, energy conservation and other consulting businesses. Our operating losses from the other businesses segment were ¥19 million, ¥335 million and ¥423 million for the years ended March 31, 2005, 2006 and 2007, respectively.

      Business in China

          Through Nissin Leasing (China) and its subsidiaries, Shanghai Matsuyama Nissin Investment & Consulting Co., Ltd. and Shanghai Nissin Trading Import & Export Co., Ltd., we provide various non-bank financial services to our customers in connection with their businesses in China. We operate a full-scale leasing business in China under a leasing license obtained from the Chinese government in September 2005. We provide leasing services to our customers that seek to lease equipment including construction machinery, office equipment and medical equipment. As of December 2006, we have finance lease assets of ¥2,818 million and 331 customer accounts. During the year ended March 31, 2007, we began trading activities focusing on equipment import and export services and factoring services. We have also recently commenced a consultancy business in China to provide consulting services for companies contemplating conducting business in China, as well as for Chinese companies contemplating conducting business in Japan.

Channels for the Origination, Guarantee and Acquisition of Loans and Real Estate

          We have various loan acquisition channels for the origination and guarantees of loans for our integrated financial services segment and for the acquisition of distressed loans for our servicing business segment. For our real estate business segment, real properties are acquired mainly through referrals and utilization of the Group, allied company and customer networks.

          Within our integrated financial services segment, our direct channels include our loan offices and automated telephone services. In addition, through alliances primarily with financial institutions, we originate business through affiliates and third-parties, taking advantage of their customer databases and brand recognition. We refer to this as our “financial OEM” strategy, in the sense that we provide our original financial products through our alliance companies’ brands and marketing channels.

      Integrated Financial Services

          We have sought to improve our operating efficiency by relying less on costly physical infrastructure. Most of our competitors rapidly spread their physical presence throughout Japan, particularly in the 1990s, with the establishment of networks of automated loan machines and proprietary ATMs. Instead, we shifted our focus to eliminate unnecessary physical infrastructure, relying on telephone, loan office and Internet interaction with our customers. More recently, we have diversified our loan acquisition channels by using the channels of our alliance companies, as we seek alternative ways, other than direct channels, to develop our loan business while avoiding deterioration in the credit levels of our customers. However, the amount of loan origination from our direct channels is increasing, primarily because of our focus in recent years on real estate financing, which usually originates from our direct marketing and typically entails a large principal amount.

          In addition, we guarantee secured and unsecured SME loans receivable and unsecured consumer loans receivable of alliance companies. We have sought alliances, especially with regional financial institutions, to expand our customer base of SMEs, and focused efforts on business expansion and promoting efficiency by pursuing group synergies. The following tables show loans originating from new customers and loans guaranteed through our various distribution channels:

           Direct Channels

          The following are our principal direct channels, which have traditionally been and continue to be our most important channels to acquire loans for our loan business:

	•		Loan Offices . Our loan offices enable loan applicants and current borrowers to meet with our employees, who provide a full range of services, including disbursement of cash, collection of repayments and responses to balance inquiries. Loan offices are generally located near train stations and city centers in buildings owned or used by banks and insurance companies. The total number of loan offices as of March 31, 2005 decreased significantly compared to that as of March 31, 2004, because we eliminated a substantial number of our general branches following the sale of most of the outstanding balance of our consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) in June 2004 and concentrated our resources in providing loans to SME owners. The total number of loan offices, however, increased from March 31, 2005 to March 31, 2006, because of the acquisition of APREK, which also originates loans to SME owners. We have recently integrated a number of our loan offices, while at the same time expanding loan offices, and shifted our managerial resources into major metropolitan areas in Japan to promote real estate financing, investment banking and venture capital businesses, as well as other businesses. We established the Real Estate Finance Department in February 2004, the Tokyo Sales Department in July 2004, the Osaka Sales Department in February 2005, the Kyushu Sales Department in June 2006, and the Nagoya Sales Department in March 2007. As a net result of this expansion in major metropolitan areas and integration of offices, our total loan offices decreased to 44 offices as of March 31, 2007.
			The following table shows selected information regarding our loan offices:

			The number of full-time employees at loan offices decreased from March 31, 2003 to March 31, 2005, because we increased the number of seconded employees to affiliates and alliance partners in connection with our alliance strategy. Also, the sale of our unguaranteed consumer loans in June 2004 contributed to the decrease in the number of employees at loan offices. Subsequently, as of March 31, 2006 the number of full-time employees and employees dedicated to loan origination increased because of our acquisition of APREK for the development of the SME financing market in Japan’s Kyushu region. The number of employees dedicated to loan origination as of March 31, 2007 subsequently decreased as a result of our integration of loan offices in line with our strategic shift of managerial resources as described above, despite a steady increase in the number of full-time employees from March 31, 2005 mainly due to recruitment of new and mid-career employees for our real estate financing operations and leasing business in the People’s Republic of China.
	•		Automated Telephone Service . We primarily serve our Business Timely and unguaranteed consumer loan customers through our automated telephone service, which we call the telephone cashing system. Loan applications through the telephone currently comprise a majority of all applications and all loans extended. After opening an account, customers place a toll-free call and follow pre-recorded instructions on our computer system to receive computerized services such as for balance inquiries and withdrawal of funds up to their authorized limit. These services enhance convenience for our customers by eliminating the need, and for some customers, embarrassment of visiting a loan office or ATM of a consumer finance company. They also greatly reduce the need and costs of personal service from our staff.

           Alliances

          With the aim of establishing a strong business infrastructure and expanding our sales channels, we have entered into business and capital alliances with various companies, including banks. We maintain numerous referral relationships with other finance companies. These relationships provide an opportunity for these alliance companies to generate fees, in the form of commissions we pay based on acquired loan balances, in respect of loans that these companies would otherwise reject because of the indebtedness level of the applicants. We benefit from these relationships because we believe our credit assessment expertise gives us an advantage in evaluating the creditworthiness of such borrowers. In addition, we currently rely mainly on the channels of our alliance companies to provide loan guarantees. The following table shows our major strategic alliances and loans originated to new customers and loans guaranteed through each alliance company:

      Servicing Business

          We acquire distressed loans for our servicing business segment through various channels including banks, domestic/foreign investment funds, non-bank financial companies and the Resolution and Collection Corporation (RCC). Auctions are another channel for us to acquire distressed loans. We typically seek to bid in auctions based on a target of recovering 200% of the amount invested over the next five years. However, an increase in the number of companies entering the loan servicing market, together with the contraction in liquidity in the market for non-performing loans due to the economic recovery in Japan, has led to increasingly severe competition. In response to these factors, and in order to maintain our competitiveness in the purchase of distressed loans, we have pursued a proactive approach to financial institutions, efficient collection activities which take into consideration the customers’ revitalization efforts and profitability, and enhancement of real estate-related businesses. We believe that these activities, together with the development of new areas of business such as liquidation of assets and securitization-related and corporate revitalization-related businesses, have allowed us to maintain competitiveness in the current business environment.

      Real Estate Business

          Through NIS Property, we purchase real estate, particularly commercial properties as well as residential rental properties, which we believe can be operated for profit or resale at a higher price following renovations of the property or improvements in property management. The information about these real estate properties is brought to us predominantly through referrals from existing customers, trade connections and group companies, in particular Nissin Servicer, NIS Lease, Araigumi and our Real Estate Group. We also utilize our Group network of relationships with SMEs and allied companies in Japan as well as the personal networks of our employees to find investment grade real estate properties. In addition, taking advantage of our network of financial institutions selling distressed loans collateralized by real estate properties and our experience in servicing such loans, we acquire distressed real estate properties that we believe can be restructured and resold at a higher price. We conduct this business through Nissin Servicer.

Competition

      Business Owner Finance Industry

          Japan’s small business finance industries are becoming increasingly competitive. In the past, the country’s financial system was more strictly regulated. In recent years, however, the Financial Services Agency of Japan (“FSA”) and other government bodies have taken steps to deregulate the financial system and allow increased competition.

          We strategically target SMEs and their owners for our products and services. In this regard, our products and services include those targeted at individual business owners as well as those targeted at businesses, in some cases enhanced by guarantees or collateral of the owners or third-parties. We compete with bank and non-bank finance companies in relation to our products and services to SMEs. The major categories of competitors include the following:

          We compete in our market on the basis of interest rates, speed and effectiveness of credit assessment and credit risk management, product mix, ability to identify and maintain relationships with strategic partners for customer referrals, brand recognition, location and network of offices and marketing.

          Although we sold most of the outstanding balance of our unguaranteed consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) in June 2004, we continue to provide services for a few of our remaining customers. With respect to these products, we compete with large Japanese consumer finance companies and credit sales companies, including Takefuji Corporation, Acom Co., Ltd., Promise Co., Ltd. and Aiful Corporation, which continue to seek greater market share in the consumer finance market through extensive marketing.

      Loan Servicing Industry

          We compete in the Japanese loan servicing industry through Nissin Servicer. The industry has grown rapidly in the last few years due to the accelerated disposal of non-performing loans by Japanese financial institutions. However, the competition is also intensifying as the number of entrants into the industry has increased, resulting in increased prices of distressed loans. According to the Ministry of Justice, 96 companies were registered as licensed servicing companies as of December 31, 2006, of which we believe 13 companies were affiliated with consumer finance or SME loan companies. Our current and potential competitors include the Japanese financial institutions that have obtained or may obtain a license to operate in the loan servicing market. We compete in this market on the basis of our ability to identify loan servicing opportunities, the purchase price we offer, loan servicing capability, effectiveness of credit assessment and credit risk management and brand recognition.

      Chinese Leasing Industry

          We compete in the Chinese leasing industry through Nissin Leasing (China), which provides leasing, consulting and factoring services in China. Though competition is increasing with major Japanese leasing companies strengthening their businesses in the China region, we believe we can differentiate ourselves by focusing our business mainly on local Chinese entities.

      Real Estate Industry

          We compete with major Japanese and foreign real estate and property companies, including property development companies and real estate investment funds. Acquiring suitable land in Japan at favorable prices has become increasingly difficult as competition in this industry has intensified over the past few years. However, we believe we can successfully compete by taking advantage of our network of relationships with SMEs and alliance companies in Japan and support from our group companies, as described in “Our Operations — Real Estate Business Segment ” above.

Regulation

      The Moneylending Business Law, the Contributions Law and the Interest Rate Restriction Law

          We are subject to an extensive regulatory scheme under Japanese law, including:

	•		The Law Concerning Regulations on Moneylending Business, etc., which will be renamed the Moneylending Business Law by mid-December 2007 as explained in “ Recent Developments ” below (the “Moneylending Business Law”);
	•		The Law Concerning the Regulation on Acceptance of Contributions, Money Deposits and Interest (the “Contributions Law”); and
	•		The Law Concerning the Regulation of Interest Rates (the “Interest Rate Restriction Law”).

          The FSA has also released administrative guidelines (“FSA Guidelines”) to clarify the administrative application of, business practices under and supervision procedures of the Moneylending Business Law.

           Registration Requirements

          Under the Moneylending Business Law, any company wishing to engage in moneylending is required to be registered as a moneylender with the Commissioner of the FSA if it lends money through offices in more than one prefecture of Japan. Such registration is required to be renewed every three years. The FSA must reject a registration or renewal application if it contains any untrue statement or omission of a material fact, or the applicant is disqualified under the Moneylending Business Law. A disqualified person includes:

	•		any person who has had his/her registration revoked as a result of misconduct or other reasons specified under the Moneylending Business Law within five years of the application;
	•		any person who has been fined for violating the Moneylending Business Law or the Contributions Law or other specified statues and five years have not passed since the person completed the payment of the fine (or became excused from paying it);
	•		any person who was sentenced to imprisonment for any reason and five years have not yet passed since person completed the term of imprisonment (or became excused from serving it);
	•		any person in respect of which any of the Directors, Statutory Auditors or specified senior employees thereof is a disqualified person;
	•		any person who is identified as a member of a crime syndicate; and
	•		any person who does not meet the minimum net asset requirement of ¥3 million, in the case of an individual, or ¥5 million, in the case of a corporation.

          We registered under the Moneylending Business Law in 1984, and have since renewed our registration periodically as required. Our registration permits us to engage in the moneylending business in all prefectures of Japan in which we presently conduct the business.

           Government Supervision

          The FSA has general authority to supervise and discipline registered moneylenders in Japan under the Moneylending Business Law. A registered moneylender with an outstanding loan balance of more than ¥50 billion at the end of its fiscal year is required to submit an operational report to the FSA concerning its operations during the fiscal year, including information with respect to officers, employees, loan offices, sources of funding and status of loans, together with its financial statements for the fiscal year, within two months of the end of such fiscal year. As explained in “ Recent Developments ” below, according to amendments to the Moneylending Business Law that will come into effect by mid-December 2007, all registered moneylenders will become required to submit operational reports within three months after the end of every fiscal year end.

          The FSA may also request that a registered moneylender make further reports under the Moneylending Business Law. An official of the FSA may also enter a registered moneylender’s offices, inspect its books, documents and other materials or interview its officers, employees and other related persons as may be necessary to protect the interest of the moneylender’s customers. The FSA may suspend all or part of a registered moneylender’s business for up to one year under specific circumstances, including any violation of the provisions of the Moneylending Business Law. The FSA must revoke the registration of a registered moneylender under certain specific circumstances, including when the moneylender becomes a disqualified person for the purpose of registration or renewal or when the moneylender is in significant violation of the provisions of the Moneylending Business Law. Under the amendments to the Moneylending Business Law, supervision by the FSA will be enhanced, and the FSA will be able to issue business improvement orders to registered moneylenders.

           Restrictions on Usury

          The Contributions Law, the Interest Rate Restriction Law and the Moneylending Business Law primarily regulate the interest rates we may charge with respect to our operations conducted in Japan.

          Under the Contributions Law, charging or receiving interest at a rate exceeding 29.2% per year is subject to criminal penalty. Any violation of such maximum interest rate is subject to a criminal sanction of imprisonment of up to five years and/or a penalty of up to ¥10 million, in the case of an individual, and up to ¥30 million, in the case of a corporation.

          The Moneylending Business Law provides that any loan made by any person who engages in the moneylending business that carries an interest rate in excess of 109.5% per year is invalid.

          The Interest Rate Restriction Law further provides that a loan that carries an interest rate exceeding a prescribed rate per year is invalid with respect to the portion of interest exceeding the maximum rate. As of the date of this annual report on Form 20-F, the prescribed rates are:

	•		20% per year for loans of less than ¥100,000;
	•		18% per year for loans of ¥100,000 or more but less than ¥1,000,000; and
	•		15% per year for loans of ¥1,000,000 or more.

          The Moneylending Business Law provides, however, that a payment by a borrower or guarantor of interest in excess of the rate prescribed by the Interest Rate Restriction Law to a registered moneylender is valid and non-refundable so long as the excess interest is paid voluntarily without coercion, mistake or threat and additional requirements are satisfied, including:

	•		delivery by the registered moneylender to the borrower or the guarantor, as the case may be, upon execution of the relevant loan or guarantee agreement, of a prescribed written instrument setting forth the principal terms of the loan or the guarantee; and
	•		delivery by the registered moneylender to the borrower or guarantor, upon the payment of the excess interest, of a written receipt for the payment.

          In addition, the FSA Guidelines require a registered moneylender to provide the borrower with written notice of the terms of any loans extended under a loan agreement at the time of each disbursement, if multiple loans may be provided under the same loan agreement.

          It had been typical for most lenders in the Japanese consumer finance and business finance industries including us to charge so-called “gray-zone” interest rates on loans that exceed the relevant maximum rates permitted under the Interest Rate Restriction Law. Collection of unpaid interest in excess of the maximum levels per year under the Interest Rate Restriction Law is legally unenforceable by us. The “gray-zone” rates charged by us, however, are below the levels that would subject us to criminal penalty under the Contributions Law. When paid by the borrower, the excess interest portion of loans subject to “gray-zone” rates is non-refundable, so long as we have met the requirements stated above (subject to the recent Supreme Court decisions as described below). Despite the historical practice in the Japanese consumer finance and business finance industries, we have generally reduced the interest rates applicable to our loans originated on and after October 1, 2006 to the maximum amounts under the Interest Rate Restriction Law, and, accordingly, the amount of our current loans with “gray-zone” interest has significantly decreased.

          Previously the number of borrowers refusing to pay interest in excess of the Interest Rate Restriction Law was limited. More recently, the number of borrowers that refuse to pay this “gray-zone” interest or request refunds of “gray-zone” interest previously paid has increased. This has been due to a combination of factors, including increases in the number of individuals in Japan experiencing financial difficulties as a result of economic difficulties in Japan, greater consumer activism and decisions reached by the Supreme Court of Japan concerning excess interest and the necessary requirements pertaining to excess interest, which were interpreted in favor of consumers, resulting in an increase in demands by borrowers for refunds of excess interest. Since January 13, 2006, the Supreme Court of Japan has decided a number of cases relating to the ability of moneylenders like us to enforce deemed valid payments of “gray-zone” interest. In particular, in January 2006, the court ruled that the voluntary payment requirement for deemed valid payments under the Moneylending Business Law should be interpreted strictly, that an “acceleration clause” in a loan agreement is invalid with respect to a delay in the payment of excess interest and that, unless there is some particular situation such that the borrower is not misled into believing that such a clause is valid, the voluntary nature of excess interest payments, which is the requirement for deemed valid payments, will not be recognized. As a result of these court decisions and regulatory changes, when a borrower exercises his or her legal right to refuse to pay interest in excess of the level set by the Interest Rate Restriction Law, we cannot collect the excess interest, despite the terms of our contract. In addition, we are no longer able to demand immediate repayment of the remaining balance in such instances. Also, following such court decisions, the Enforcement Regulation of the Moneylending Business Law was amended effective as of July 1, 2006 such that our loan documentation must now specifically provide that we may not accelerate a loan as a result of non-payment if such non-payment relates only to interest charged in excess of the prescribed maximum rates under the Interest Rate Restriction Law (i.e., “gray-zone” interest). Therefore, borrowers who fail to repay the unpaid excess interest portion will not be subject to the general collection procedures applicable to borrowers. We negotiate refunds of previously paid excess interest in certain situations primarily involving threatened customer bankruptcy or threatened litigation.

          The Interest Rate Restriction Law also applies to discounted loans. A discounted loan results when an interest amount is deemed to have been deducted in advance because the stated value of the loan exceeds the actual cash disbursement in respect of the loan. This deemed interest amount is subject to the general restrictions on interest under the Interest Rate Restriction Law. We do not make any discounted loans.

      Recent Developments

          Amendments to the Moneylending Business Law, the Contributions Law and the Interest Rate Restriction Law were promulgated on December 20, 2006 and are scheduled to become effective gradually over the next few years. As of an effective date to be fixed by a cabinet order to be issued and within one year from the promulgation date, moneylending businesses will become subject to enhanced regulations, such as the introduction of additional documentary requirements and an increase in the number of prohibited activities, including an expansion of prohibited collection activities. Furthermore, supervision over moneylending businesses will be enhanced including by enabling the FSA to issue to registered moneylenders business improvement orders to take measures to improve their business. Within two and a half years from this effective date and approximately three years from the promulgation date, the amendments will be fully in force. When in force, these amendments will:

	•		abolish the concept of deemed valid payments under the Moneylending Business Law;
	•		reduce the maximum interest rate under the Contributions Law from 29.2% per year to 20% per year;
	•		introduce administrative sanctions on charging interest in excess of the maximum interest rate under the Interest Rate Restriction Law, even if the rate charged is below the maximum interest under the Contributions Law;
	•		obligate a registered moneylender to investigate customers’ ability to repay and prohibit excessive lending in respect of loans to individual customers, based on the aggregate amount which a customer owes to moneylenders; and
	•		introduce further documentation requirements such as deliver of a prescribed written instrument prior to entering into a loan agreement.

      Servicer Law

          With the purpose of protecting borrowers from unfair collection practices, the Practicing Attorney Law of Japan (the “Attorney Law”) stipulates that no person other than a qualified attorney can engage in providing legal services and that no person can engage in acquiring claims in order to enforce them against debtors. In February 1999, the Law on Debt Servicing Business by Servicing Companies (the “Servicer Law”) was enacted in order to facilitate third-party debt servicing for performing and non-performing loans of financial institutions and to deal effectively with the sale, liquidation, and servicing of their bad loans.

          The Servicer Law requires a minimum capital of ¥500 million in order to be eligible to be licensed by the Minister of Justice of Japan to conduct third-party servicing business. In addition, to make this law consistent with the provisions of the Attorney Law, at least one attorney must be appointed as a director of a licensed debt servicing company.

          The Servicer Law covers a range of financial assets including:

	•		loans receivable held by financial institutions (including banks, insurance companies and finance companies licensed under the Moneylending Business Law and other miscellaneous financial entities), money claims prescribed by the Law Concerning the Securitization of Assets, and other claims provided for in cabinet orders; and
	•		loans receivable under bankruptcy or rehabilitation proceedings and loans receivable which are securitized through special purpose vehicles.

          A company operating as a licensed servicer under the Servicer Law is entitled to manage and collect receivables in relation to claims on behalf of its clients or its own account. A licensed servicer is also able to engage in real estate transactions in connection with secured loans.

      The Personal Information Protection Law

          The Law Concerning the Protection of Personal Information (the “Personal Information Protection Law”) clarifies the legal duty of a business operating in Japan to protect personal information by setting out basic principles for the proper treatment of such information. The Personal Information Protection Law applies to information concerning individuals and does not extend to corporate information. The Personal Information Protection Law applies to personal information-handling enterprises or data collectors, defined as persons that use databases that contain the personal information of 5,000 or more people. A personal information database is defined as a collection of information which is systematically arranged to conduct searches.

          Guidelines issued by Japanese governmental authorities have further supplemented the Personal Information Protection Law, in particular, the guidelines concerning Protection of Personal Information in Financial Areas issued by the FSA govern the moneylending business. Industry associations have also established guidelines for their member organizations, detailing how such organizations must comply with the Personal Information Protection Law.

          Personal information, as defined by the Personal Information Protection Law, includes any information that distinguishes a living individual from another living individual. This includes a person’s name, address, birth date, birthplace, phone number, financial history, employment history, academic history and occupation.

          The Personal Information Protection Law provides the following general restrictions on the use of personal information:

	•		the purpose of the use of information must be specified as much as possible;
	•		personal information may not be obtained through fraud or by other illegal means;
	•		upon acquiring the personal information, the use of information must be notified to the relevant individual or published;
	•		personal information collected should be relevant to the purposes for which it is to be used and, to the extent necessary for those purposes, should be accurate and kept up to date;
	•		to prevent loss, unauthorized access, destruction, use, modification or disclosure of personal information, security safeguards must be implemented;
	•		personal data may not be disclosed or made available to third-parties without the prior consent of the individual to whom the personal information relates;
	•		the purpose of use of all personal data and the procedures of amendment, suspensions, etc., of the use or deletion of personal data must be made available to the individual to whom the personal information relates; and
	•		use must correspond to a person’s requests to control his or her personal information, including amendment, suspension of the use or deletion of his or her personal data.

          Data collectors must deal adequately and promptly with complaints regarding their use of personal information. For example, a data collector is expected to appoint a person who is responsible for customer information, and establish complaint hotlines. If data collectors violate their duty by disregarding the competent minister’s orders, they may be subject to imprisonment not exceeding six months, or a fine not exceeding ¥300,000.

 

Item 5. Operating and Financial Review and Prospects

A. Operating Results.

      You should read the following discussion and analysis of our financial condition and results of operations together with Item 3.A of this annual report on Form 20-F and our audited U.S. GAAP financial statements, including the notes to these statements, beginning on page F-1 of this annual report on Form 20-F . This discussion and analysis is based on U.S. GAAP financial information except as noted otherwise. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including but not limited to those in Item 3.D of this annual report on Form 20-F .

      We focused mainly on the moneylending business in the past. However, we recently have been diversifying our financial businesses. In order to reflect the strategic business changes in our consolidated financial condition and results of operations, we changed the format of our consolidated financial statements of operations. Accordingly, the following discussion and analysis of our financial condition and results of operations has been stated based on the current presentation of the consolidated financial statements of operations as so reformatted.

Overview

     We derive our revenues primarily from the business of providing integrated financial services to SMEs and their owners in Japan. We provide our services, and receive revenues, both directly and through alliances and joint ventures with other companies including financial institutions. We also derive revenues from servicing distressed loans purchased from third-parties and engage in leasing and related businesses in Japan, as well as investment banking, securities and principal investment businesses. In addition, we derive revenues from real estate-related businesses, including providing secured loans to property companies and principal investment in real estate. In recent years, we have commenced leasing and other operations in China.

     Our net interest income from lending activities was ¥18,568 million for the year ended March 31, 2005, ¥17,970 million for the year ended March 31, 2006 and ¥6,319 million for the year ended March 31, 2007. Interest income from loans receivable is our largest source of revenues, however, the proportion of interest income to other revenues has fallen in recent years, as we have diversified and expanded our business operations. In the loan business, we have reduced interest rates on our financial products and shifted our operations to target more creditworthy customers, and we have focused intensively on secured lending. We sold most of the outstanding balance of our unguaranteed consumer loans in June 2004 and we have been strategically shifting away from consumer loans in recent years in order to concentrate our resources on providing financial services to SMEs and their owners, with secured lending as a focus.

     As part of our strategic transition of the loan business, we established our Real Estate Finance Department to focus on loans designed for property companies. We also established our Real Estate Group to supervise all real estate-related businesses. We subsequently established our Real Estate Structured Finance Department under the Real Estate Group in order to provide non-recourse loans, arrange loans and provide other services to property companies, including special purpose companies for real estate-related businesses. Profits derived from these strategic changes in our loan business have contributed to our results, particularly in the recent severe business environment for moneylending companies in Japan resulting from recent decisions by the Supreme Court of Japan concerning “gray-zone” interest and other factors.

     In addition, we have prioritized allocation of consolidated managerial resources to growing business, such as the servicing business and the real estate business, and also seek to establish a business platform and system to expand our financial business in the People’s Republic of China, centering on the leasing business. This has contributed to a growth in revenues other than interest income from lending activities in recent years. Other revenues were ¥5,003 million for the year ended March 31, 2005, ¥11,445 million for the year ended March 31, 2006 and ¥17,585 million for the year ended March 31, 2007.

     Our net income was ¥7,262 million for the year ended March 31, 2005 and ¥8,455 million for the year ended March 31, 2006. We sustained net losses of ¥1,610 million for the year ended March 31, 2007. Our net income fell significantly into net losses for the fiscal year ended March 31, 2007, primarily as a result of our recognition of ¥12,664 million as provision for losses on excess interest repayments, in order to respond to adverse changes in the business environment for the moneylending industry in Japan. (See “Critical Accounting Policies — Reserve and Provision for Losses on Excess Interest Repayments ” below.)

     We currently report our business activities in accordance with the following four business segments:

	•		integrated financial services;
	•		servicing business;
	•		real estate business; and
	•		other businesses.

   Integrated Financial Services

     We categorize our loans in the integrated financial services into the following four primary categories:

	•		Secured Loans . Secured loans are conventional loans secured by real property or securities to SMEs or individuals. Recently, our secured loan portfolio has grown significantly, reflecting our strategic shift toward promotion of financial services to property companies, SMEs and their owners centering on real estate financing, through active sales and marketing efforts by our Real Estate Finance Department, which was established in February 2004. In order to strengthen these operations, we established the Real Estate Group in June 2006, which supervises all real estate-related businesses, and the Real Estate Structured Finance Department under the Real Estate Group in September 2006, to provide real estate-related services particularly for securitization, including non-recourse loans, loan arrangement, and other services. As a result of these efforts, the percentage of interest income derived from secured loans has been increasing.
	•		SME Loans . SME loans are primarily unsecured loans to SMEs and their owners guaranteed by, in general, one or more guarantors. SME loans also include unguaranteed, unsecured loans made under pre-approved revolving credit lines to more creditworthy SME owners. As of March 31, 2007, the amount of total SME loans outstanding and number of customer accounts decreased compared to the end of the previous fiscal year, primarily as a result of our strategic shift in focus to real estate financing. SME loans are generally originated through the direct telemarketing efforts of our loan offices and our newly established sales departments in metropolitan areas in Japan, such as Tokyo, Osaka, Kyushu and Nagoya. SME loans are also originated through referrals from companies with whom we have strategic alliances. Interest income derived from SME loans has contributed significantly to our total interest income.
	•		Consumer Loans . Consumer loans are unguaranteed, unsecured loans to individuals. In line with a strategic shift over the last several years toward promotion of financial services to SMEs and their owners, on June 1, 2004, we sold most of the outstanding balance of our unguaranteed consumer loans to NETCARD, Inc. (formerly known as Orient Credit Co., Ltd.) for ¥32,697 million. See “Factors Affecting Our Financial Results — Sale of Consumer Loans ” below for a further discussion.
	•		Other Loans. Other loans mainly consist of investment in direct financing leases and installment loans to SMEs through our wholly-owned subsidiary, NIS Lease. Such loans are generally designed to meet the capital needs of SMEs in Japan for expansion of their businesses.

     In addition, we guarantee loans to customers of third-party lenders for which we receive guarantee fees. Also, we engage in investment banking and securities business through our Investment Banking Department and our subsidiaries, NIS Securities and NI Strategic Partners.

     The following table provides information on the average balance of loans outstanding for each of the years indicated for each of our main product categories and the percentage of total average loans outstanding represented by each loan category for the years ended March 31, 2005, 2006 and 2007:

		Year Ended March 31,
		2005								2006								2007
		(In millions except percentages)
Secured loans		¥	9,976				6.7	%		¥	39,496				21.5	%		¥	115,779				45.3	%
SME loans			76,651				51.5				86,976				47.3				88,159				34.5
Consumer loans			58,018				39.0				47,250				25.7				39,621				15.5
Other loans			4,166				2.8				10,243				5.5				12,236				4.7
Total average balance of loans outstanding		¥	148,811				100.0	%		¥	183,965				100.0	%		¥	255,795				100.0	%

     The following table shows the interest income from loans receivable and the percentage of our net interest income from loans receivable derived from each major category of loans for the years ended March 31, 2005, 2006 and 2007:

     In addition, we also acquire real estate for sale in line with the disposal by financial institutions of non-performing loans. The following table shows the aggregate purchase price of real estate for sale and revenue from sales of real estate:

     We expect that the relative importance of this operating segment will continue to increase in the short to medium term.

   Real Estate Business

     We operate our real estate business (excluding secured lending and real estate servicing) mainly through our subsidiary, NIS Property. We purchase, renovate and develop commercial and residential real estate to operate for profit and for resale in Japan. In the real estate business segment, we purchased real estate for sale in the aggregate amount of ¥468 million, ¥16,702 million and ¥34,834 million for the years ended March 31, 2005, 2006 and 2007, respectively.

     With respect to real estate operated for profit, we seek to increase property value through renovation and other improvements in order to ensure stable revenues and occupancy rates. With respect to real estate sold for profit, we sold four and seven commercial properties during the years ended March 31, 2006 and 2007, respectively, mainly to property companies in Japan. The following table sets forth our primary revenues from the real estate business for the periods shown: