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.