Writing off bad loans

Writing off bad loans

The decision of the central bank (Bank Indonesia) to go ahead
with its plan to enforce a mandatory write-off of bad credits
should be welcomed as another effort to ensure the soundness of
banks in the country. Letting banks carry non-performing assets
in their balance sheet will not only result in misleading
information for the general public, but is also not conducive for
the development of a sound banking industry.

The latest figures put the total sum of problem loans at Rp
30.44 trillion (US$12.95 billion) or 10.75 percent of the total
bank credits outstanding as of the end of April, up from Rp 27.88
trillion as of last year. Of the total, Rp 9.02 trillion or 3.2
percent of total bank credits consisted of bad credits, also up
significantly from Rp 8.79 trillion as of last year.

We noticed, though, that many banks have expressed
reservations on the central bank's move, citing differences of
views with the tax directorate general regarding banking secrecy,
or maintaining confidentiality in regards to clients, as a major
obstacle to the enforcement of the mandatory write-off.

The tax directorate general, which is responsible for
collecting all taxes due from individual and corporate taxpayers,
has every reason to demand transparency regarding the write-off.
The rationale is that the write-off of a bad credit shall be
defined as an income for the debtor. Hence, it is entitled to be
informed of the debtors whose debts are written off. However,
banks argue that it is against the Banking Law's provision on
banking secrecy to disclose information on their clients.

The banks' point of argument seems to be weak because they see
banking secrecy as absolute. That is not the case at all. In
fact, another article of the law allows for the disclosure of
information under special circumstances, such as tax or criminal
investigations, but with prior approval from the finance
minister. Hence, the spirit of banking secrecy is to protect only
good clients (depositors and borrowers) and not the crooks.

The mandatory write-off scheme, as designed by the central
bank, gives banks two options: Either simply transferring the
non-performing credits (assets) out of the balance sheet to off-
balance sheet accounts or completely writing off the bad credits
as total losses. Under the first option, banks are required to
clean their balance sheet of non-performing loans to reflect
their real productive assets, even though they are still in the
process of recovering those assets. The second option is designed
only for debtors who go bankrupt.

The second option causes no problem in so far as banking
secrecy is concerned because the case of bankruptcy normally
follows a transparent procedure through a court decision, media
announcement and public auction of loan securities. However, the
first option should be treated carefully to prevent unnecessary
damages to the debtors in good faith. But cautious treatment
should not necessarily mean that information on the debtors
cannot be disclosed to the tax directorate general because tax
officials are also prohibited from divulging to outsiders any
information they gather in the execution of their official duty.

As far as tax obligations are concerned, banks have no
additional burdens in writing off bad loans because they are
allowed to deduct from their taxable income as much as 3 percent
of their total credits outstanding as provisions for bad loans.

We suspect, therefore, that banks which use banking secrecy as
an argument against the mandatory write-off are trying to hide
mistakes or even collusion. It is not simply a coincidence, for
example, that over 70 percent of the bad credits belong to state
banks, where lending decisions often have been based on memos
from influential figures or collusion between credit officers and
borrowers.

Hopefully, the government regulation on the mandatory writing
off of bad credits, which is expected to be issued within the
next few weeks, will stipulate clearly in details what shall be
protected by banking secrecy and what shall be disclosed to
prevent banks from hiding mistakes or unsound practices.

Most importantly, the central bank should not allow banking
secrecy to be used by banks to hide their mistakes or collusion,
least of all the crooks.