BI to go ahead with mandatory write-off plan

JAKARTA (JP): Bank Indonesia plans to go ahead with its mandatory write-off policy for banks even though its implementation will be contradictory to certain tax regulations, a senior central bank official said yesterday.

Heru Soepratomo, the central bank's managing director for the supervision of commercial banks, said that Bank Indonesia is currently preparing guidelines for the write-off regulation.

"We have no plan to delay the issuance of the write-off policy even though the taxation issue is likely to remain a problem," he said during a discussion on the effectiveness of write-offs as a means of dealing with bad debts.

Speakers at the panel discussion, held by the Center for Fiscal and Monetary Studies, featured I Made Erata, the director for income tax at the Directorate General of Taxes; Trenggono Poerwosoeprodjo, chairman of the federation of domestic private banks; Novyan Kaman, a member of the House of Representatives; and business analyst Jasso Winarno.

He said that the central bank and the Ministry of Finance will work together to seek a solution to the taxation problems encountered when banks write off bad loans. The policy would also conflict with certain banking laws.

The government allows banks to use a maximum of 3 percent of their productive assets as a reserve against loan losses. The 3 percent reserve is not taxable because it is categorized as cost.

However, on the borrower's side, once the loans are written off they are categorized as income and subject to taxation.

At present, writing off is not mandatory for banks.

Heru said that many banks cannot write off their bad loans -- even if they have enough reserves to offset the bad loans -- due to different interpretations of the regulations on tax payments.

Regardless of Bank Indonesia's decision, conflicts already exist between the nation's banking and tax laws.

According to tax regulations, a borrower whose loan is written off a bank's balance sheet must be reported to a local office of the Directorate General of Taxation. However, according to a law on banking secrecy, banks are not allowed to report the names of borrowers to third parties other than the central bank.

Erata said that keeping the names of the borrowers could facilitate tax evasion because the write-offs are subject to taxation.

"I think the government should issue a new decree to clarify the banking secrecy law so that the tax office will not have a problem in verifying the loans written off by banks," he said.

Members of the House of Representatives have called on the central bank to be careful about issuing the mandatory write-off policy.

Soewarno, a House member from the Armed Forces faction, said that the policy could encourage borrowers to default on their loans because it will free them from being under the direct control of the banks.

He said that banks generally have to recoup written-off loans through the courts or their own internal bad loan mechanisms.

"Some borrowers feel more comfortable knowing their names are protected under the banking secrecy regulation," he said.

He shared Erata's view on the need for a decree to further clarify the regulation.

Identifying loan defaulters would help tax offices with tax verification and make public the means by which loans are written off.

Bad loans in the country's banking industry totaled more than Rp 9.02 trillion (US$3.8 billion) as of April this year, of which Rp 6.38 trillion occurred in state-owned banks. (hen)