Shares of Japanese consumer lenders soared on Monday after a source said the government may ease regulations that have crippled the sector and raised hurdles for small businesses to get loans.

The government will launch a study group as early as this month to reassess regulations, including a cap limiting unsecured loans to one-third of an individual's annual income, a government source with knowledge of the matter told Reuters.

The source, who spoke on condition of anonymity because the issue has not been made public, said the talks would include high-ranking officials from the financial regulator and would aim to craft measures to help small business owners get funds.

The news, first reported by the Nikkei business daily on Sunday, triggered a rally in shares of Aiful Corp (8515.T), Takefuji Corp (8564.T), Promise Co (8574.T) and Acom Co (8572.T).

Shares in Japan's top four consumer lenders surged between 17 and 23 percent.

The lenders, which offer unsecured loans to borrowers with weak credit, have been hammered by regulations introduced in 2007 lowering maximum interest rates and court rulings forcing them to repay past charges now considered illegally high.

The top four lost a combined 1.7 trillion yen ($18.9 billion) in the year to March 2007 and have not been able to regain a solid footing since. Takefuji and Promise were deep in the red last year and Aiful has asked for a moratorium on repaying its loans.

This industry has been whipped by a tightening of lending rules, and repayment claims (by borrowers) for overcharged interest have been rubbing salt into their wounds, said Okasan Securities' analyst Minoru Hattori.

People saw little hope for the future of this industry. This raises expectations things will get better.

In addition to discussing whether to keep or alter a rule limiting loans to a third of a borrower's income, government officials will also look at other possible steps to mitigate the impact of impending regulations, the Nikkei reported.

The Nikkei also quoted a government source as saying that freezing plans for tighter regulations was also a possibility.

The full implementation of a revised moneylending law, which includes lowering the maximum interest rate that can be charged to 20 percent from 29.2 percent, is scheduled for June 2010.

OVERCHARGE CLAIMS

But analysts said any easing of regulations would likely be too little, too late to restore the industry to anywhere near the high levels of profitability it once enjoyed.

The large consumer lenders have already lowered their maximum interest rates to below 20 percent and have run high-profile advertising campaigns about responsible borrowing. It would be difficult for them to reverse their stance and raise rates even if the law was changed.

It is also very unlikely that any revision would provide any relief on their obligations to repay overcharged interest, an issue that continues to eat into their profits and has severely damaged their financial health.

Last month Aiful asked its creditors to delay repayments on its roughly $3 billion in debt.

Consumers who have trouble getting money from banks or consumer lenders are rushing to file overcharge claims to get some money. It's a vicious cycle and there's no way to stop those claims right now, said Standard & Poor's analyst Naoko Nemoto.

Japan's top four consumer lenders have faced a total of nearly 1 trillion yen in overcharging claims in the past four years, the Nikkei newspaper said last month.

Bucking a fall in the broader market, shares of Aiful jumped 17.3 percent to 156 yen, Takefuji surged 23.1 percent to 427 yen, Promise gained 17.1 percent to 685 yen and Acom rose 17.1 percent to 1,372 yen.

The other financial subindex .IFINS.T jumped 5.8 percent, against a 2.3 percent fall in the Nikkei 225 average .N225.

The news pushed down potential spreads on credit default swaps, contracts used to insure against corporate failure.

The spreads on 5-year credit default swaps for Promise were indicated at 850-1,050 basis points, narrowing by about 100 points from Friday, while the spread on Acom narrowed by about 50 basis points to 470-520, market sources said.

Underscoring the tough conditions faced by the industry, Lopro Corp (8577.OS), a lender to small and medium-sized firms, filed for bankruptcy protection on Monday due to difficulties securing funds, becoming the 26th non-bank lender to fail so far this year. ($1=89.95 Yen)

Japan Nikkei 225