Also, changing regulations have eroded profits in Japan's consumer lending sector.
The U.S. company said on Thursday it will look to spin off to shareholders its entire consumer and industrial unit, signaling it wants to part with a large part of its portfolio, not just the $7 billion appliance arm it has been looking to sell.
The deal also marks a significant bet by Japan's Shinsei, which is about one-third owned by U.S. buyout firm J.C. Flowers.
The lender is wagering that it can build a profitable consumer lender by leveraging its brand and retail bank operations.
The midsize bank said it will pay 580 billion yen ($5.4 billion) for the Japanese arm of GE Consumer Finance, which includes a moneylender, Lake, as well as a credit card and housing loan operation.
"This marks our largest acquisition to date and is the biggest step we have taken towards our goal of redefining and modernizing consumer finance in Japan," Shinsei President Thierry Porte told a news conference.
The deal is likely to be finalized by the end of September, and will immediately increase earnings-per-share, Shinsei said in a statement.
Chief Financial Officer Rahul Gupta declined to say how much the bank expects the acquisition to boost earnings.
"In order to survive the regulation changes over the next two years the key is to get more market share," said Kristine Li, an analyst at KBC Securities in Tokyo.
"Profitability will never be as good as it used to be, therefore volume is critical."
Consumer lenders have seen their profits slide after Japan's parliament approved a law to lower the maximum interest rate they can charge.
The regulations will go into effect by 2009, and moneylenders have already lowered their rates in anticipation.
They have also been forced to repay previous interest that is now deemed illegally high.
The deal will give Shinsei control of 884 billion yen in total loans outstanding, and 2.2 million accounts.
Lake alone has an outstanding loan balance of 650 billion yen, making it Japan's sixth-largest consumer finance firm, according to industry group data.
Consumer lenders Acom and Promise had also been bidding for Lake, but were outmaneuvered by Shinsei and eventually dropped out, sources familiar with the deal said.
The sources spoke only on the condition of anonymity.
Acom is about 13 percent owned by Mitsubishi UFJ Financial Group, Japan's largest bank, while Sumitomo Mitsui Financial Group, the country's No.3 bank, owns about 20 percent of Promise.
As part of the deal, Shinsei will be responsible only for repaying up to about 206 billion yen worth of legal claims on overcharged interest, with the rest to be shouldered by GE, Shinsei said in a statement.
While the stricter regulation has pushed many moneylenders into debt and prompted industry consolidation, some Japanese banks see the turmoil as an opportunity to take market share.
Shinsei already owns about two-thirds of both finance firm Aplus and consumer lender Shinki.
Shinsei's Porte said the bank was not looking to integrate the units from GE with its existing businesses, but would run them separately.
However, he said the bank expected synergies from bringing its retail banking and consumer finance businesses under one management structure.
Shinsei, which introduced 24-hour banking to a country where retail banking services lag those in many Western countries, believes it can make a similar change to consumer lending.
Shinsei's Porte has repeatedly said the bank will be able to build a "new model" for the industry.
Shares of Shinsei ended Friday trade down 3 percent at 358 yen, underperforming Tokyo's index of bank stocks, which ended flat.