* Industry hit by costs of reimbursing overcharged interest
* Takefuji was seen vulnerable due to lack of bank backing
* Had $5.1 bln in liabilities as of end of June
* Company also hurt by tighter lending regulations
* S&P drops Takefuji to lowest debt rating of D. (Adds Standard & Poor's debt rating downgrade)
By Taiga Uranaka and Taro Fuse
TOKYO, Sept 28 (Reuters) - Takefuji Corp said it filed for bankruptcy on Tuesday owing $5.1 billion, making it the biggest Japanese consumer lender to fail since a court ruling in 2006 forced the industry to repay borrowers for excessive interest charges.
Takefuji, which had been considered at risk of failing as it lacked the financial backing of a big Japanese bank, said it had filed with a Tokyo court for protection from creditors, citing interest reimbursements, tighter lending rules and harsh competition.
Media had reported the likely bankruptcy filing on Monday.
The lender's president, Akira Kiyokawa, and executive vice president Takeru Takei, son of the company's founder Yasuo Takei, resigned following the court filing.
Takefuji and other consumer lenders have struggled to survive after Japanese courts ruled in 2006 that they had charged too much interest and had to repay borrowers. A recent government cap on interest rates has further hobbled the industry.
The burden of interest repayments has already claimed several smaller casualties among consumer lenders. The fear now for Takefuji's rivals is that its failure will spark a run of claims by borrowers worried they will not get refunds the court ruling promised.
Analysts said Takefuji's problems posed little wider threat to the overall system, however, because depositors' funds were not at risk.
"Takefuji has raised most of its capital in bonds, which are largely held by foreign investors, mostly hedge funds, so the bankruptcy would not have a big impact on the financial system," Deutsche Securities credit analyst Junichi Shimizu said.
Standard & Poor's dropped the lender to its lowest rating for long-term counterparty credit and senior unsecured debt, D, likely to default on its obligations.
UNDER PRESSURE
Shares of Takefuji went untraded for a second day on Tuesday on a glut of sell orders before closing at 116 yen, down by their daily limit of 50 yen, or 30 percent. The stock is down 70 percent since the start of the year.
Shares in rivals slipped further after sharp falls on Monday.
Acom Co, 37 percent owned by Mitsubishi UFJ Financial Group and considered the strongest among Japan's top four consumer lenders, fell 1.3 percent. Unaffiliated Aiful Corp slid 3.3 percent, while Promise, 20 percent owned by Sumitomo Mitsui Financial Group, declined 0.9 percent.
Shinsei Bank, Japan's first foreign-owned lender, operates two consumer finance units under the brands Aplus and Lake, which unlike competitors it funds with deposits.
By affiliating with banks, consumer lenders have secured a steady funding source, according to Takehito Yamanaka, a senior analyst at MF Global FXA Securities
"Takefuji did not have the money to make new loans, but others are not in such a situation," he said.
BONANZA OVER
Consumer finance companies emerged as big lenders in the 1990s as Japan's economy faltered and commercial banks reined in credit. Able to borrow at very low rates, they charged interest of nearly 30 percent, allowing them to absorb high default rates on uncollateralised loans. Reimbursements and the state intervention ended the bonanza.
"Lenders may need to boost their reserves and impairment of their capital as a result of any increase in demands for interest refunds," said Deutsche Securities' Shimizu.
"Aiful has a relatively thin equity capital cushion compared with Acom and Promise. Promise is weaker than Acom but the market has seen that SMFG could help the firm raise funds," he added.
Late last year, Aiful staved off bankruptcy by convincing its creditors to defer about 280 billion yen in bank loan principal payments.
Starting as a small money lender in 1966, Takefuji grew to become Japan's biggest consumer finance company. Its founder Takei was ranked by Forbes as Japan's second-richest person in 2005, worth $5.6 billion.
But a series of scandals over heavy-handed debt collection and Takei's conviction in 2004 for ordering wiretaps on journalists marked the beginning of a state crackdown on a business seen by industry critics as little better than loan sharking. Takei died in 2006.
Japan's consumer finance squeeze culminated this year in a state-engineered credit crunch. In June, the government capped interest rates at 20 percent, down from 29.2 percent, and limited the amount individuals can borrow to one-third of their income.
Japan's banking minister Shozaburo Jimi said on Tuesday the government would study the impact that interest reimbursements were having on consumer lenders, but did not comment on whether that could mean a relaxing of regulations.
Takefuji had 433.6 billion yen ($5.1 billion) in liabilities as of the end of June, research firm Tokyo Shoko Research said, including about 135 billion yen in bonds. ($1=84.29 Yen) (Reporting by Taro Fuse, Taiga Uranaka, Noriyuki Hirata and Nobuhiro Kubo; Writing by Tim Kelly; Editing by Michael Watson)