Search

 

Cablegate: Individual Debt Resolution Law

VZCZCXRO0353
RR RUEHGH
DE RUEHIN #1653/01 2050024
ZNR UUUUU ZZH
R 240024Z JUL 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 6108
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3770
RUEHBJ/AMEMBASSY BEIJING 7048
RUEHUL/AMEMBASSY SEOUL 8781
RUEHGP/AMEMBASSY SINGAPORE 6948
RUEHKO/AMEMBASSY TOKYO 8936
RUEHML/AMEMBASSY MANILA 0106
RUEHJA/AMEMBASSY JAKARTA 4104
RUEHKL/AMEMBASSY KUALA LUMPUR 3784
RUEHHI/AMEMBASSY HANOI 3353
RUEHBY/AMEMBASSY CANBERRA 4563
RUEHWL/AMEMBASSY WELLINGTON 1832
RUEHHK/AMCONSUL HONG KONG 8293
RUEHGH/AMCONSUL SHANGHAI 1239
RUEHGZ/AMCONSUL GUANGZHOU 0416

UNCLAS SECTION 01 OF 03 TAIPEI 001653

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR ALTBACH and Stratford
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/TTYANG
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN AND NY FRB MARIA
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Individual Debt Resolution Law

SUMMARY
-------

1. In June, Taiwan completed legislation of the Individual Debt
Resolution Law (IDRL), which will be effective in early 2008. The
law, designed to address non-performing unsecured loans only, will
permit insolvent individual debtors to repay a portion of
outstanding debt over a length of time longer than the repayment
period stated in the original loan contracts. At the insistence of
the banking sector, individuals already reaching rescheduling
agreements with banks will be exempt from the law. Observers worry
the law will erode the banking sector's profitability and lead banks
to make fewer unsecured loans. END SUMMARY.

Legislation Procedure
---------------------

2. In June, the Legislative Yuan (LY) completed the third and final
reading of the IDRL. The new law will become effective nine months
after the President promulgates it, in March 2008.

Debt Resolution
---------------

3. The IDRL is designed to address non-performing unsecured loans
only. There are two ways of debt resolution, i.e., debtor
rehabilitation and debt liquidation. During the debtor
rehabilitation period, creditors may not exercise their rights
against the debtors, including lawsuits. Debt liquidation is a de
facto bankruptcy procedure for individuals. The new law will only
allow eligible individual debtors to apply to the court for debt
resolution, while creditors, including banks, may not.

Eligibility
-----------

4. The law will apply to insolvent individual debtors who have not
engaged in business activities over the past five years. It will
also apply to insolvent debtors who over the past five years have
engaged in small business with average monthly sales of less than
NT$200,000 (US$6,060). Individuals who have already reached
rescheduling agreements with banks will be exempt from the
individual debtor resolution mechanism.

Debtor Rehabilitation
---------------------

Additional Eligibility Requirement
----------------------------------

5. In order to be eligible for debtor rehabilitation, a debtor's
total unsecured liabilities must be under NT$12 million
(US$364,000).

Rescheduling Negotiation
------------------------

6. Insolvent debtors will be required to engage in rescheduling
negotiations with creditor banks before application for
rehabilitation. The court may grant its permit for debtor
rehabilitation 30 days after a creditor bank does not respond to the
debtor's negotiation request or 90 days after the negotiations fail
to conclude with a rescheduling agreement.

Payment Rescheduling
--------------------


TAIPEI 00001653 002 OF 003


7. For rehabilitation, debtors are required to reschedule their
repayment plans and submit them to the court for approval. The law
will allow debtors to repay only 20% of their debt in three-month
installments over six-to-eight years.

Liquidation
-----------

8. The court may adopt a liquidation program for a delinquent
debtor if the debtor is unable to repay (defined as a person whose
income minus living expenses is less than 20% of the person's
outstanding debt), fails to come up with a rescheduling plan within
a specified period under rehabilitation, or fails to fulfill his
commitments as stated in the rescheduling agreement.

Strict Restrictions on Daily Living
-----------------------------------

9. The court will set restrictions on debtors' daily living
expenses during rehabilitation. Debtors going through liquidation
will lose freedom of movement, and may not go beyond a restricted
area set by the court. They are subject to strict restrictions on
employment, disposal of property, and spending. They may not serve
as lawyers, certified public accountants, architects, auditors, etc.
They may not run for any public office, and will be subject to a
variety of restrictions on personal expenditure. Offenders will be
sent to jail and debt reinstalled.

Discharge
---------

10. Debtors will be discharged of their liability obligation after
they fulfill their rescheduling commitments under rehabilitation, or
after they complete the liquidation procedure. Debtors may apply to
the court for resumption of their normal lives and civil rights five
years after the discharge of liability.

Concerns, Likely Consequences
-----------------------------

11. Local and foreign bankers are concerned that the IDRL will
substantially increase their unsecured loan lending risks because
the law permits discharge of liability six-to-eight years after the
interest rate is lowered, and the repayment terms are discounted and
extended. To reduce the risks, banks will tighten lending, thereby
perhaps making unsecured loans more difficult to obtain. Bankers
Association (BA) Chairman Hsu Te-nan warned that many individuals
will be forced to turn to loan sharks and underground banking
organizations. Merrill Lynch (Taiwan) estimated that moral hazard
will erode ten percent of the banking community's combined profits
next year.

12. The Banking Sector Consumers' Interest Protection Association
(CIPA), a debtors' organization headed by Legislator Shyu
Jong-shyoung (KMT), described the IDRL legislation as "belated
incomplete justice." The debtors' organization is happy that the
IDRL will help delinquent debtors resolve their debt problems. The
CIPA, however, is still upset about the deletion of a home mortgage
article that would have allowed debtors to pay discounted interest
for up to ten years before beginning repayment.

13. A Banking Bureau contact told us that the IDRL will affect
Taiwan more socially than economically. According to the contact,
an estimated 50,000 individual debtors may seek debt resolution from
the court after the IDRL becomes effective in March 2008, but the
number will be much smaller than the over 250,000 delinquent
credit/cash card debtors that negotiated with banks in 2006.

TAIPEI 00001653 003 OF 003

Comment
-------

14. The IDRL will affect Taiwan's banking sector, but is unlikely
to cause a banking crisis, as unsecured loans account for only 5-6%
of the sector's total outstanding loans, and Taiwan's average
non-performing loan (NPL) ratio is below 2.5%. To some extent, debt
resolution will erode the banking sector's profitability due to
failure to follow the prudential principle in lending.

YOUNG

© Scoop Media

 
 
 
World Headlines

 


CNS: Will India's 1 Billion Vaccination-dose-milestone Be Catalytic For Vaccinating All?

On 21 October 2021, India crossed its milestone of administering over 1 billion (100 crores) doses within 278 days since it began the vaccination rollout (on 16th January 2021)... More>>

UN: UNHCR Chief Urges Better Support For 13 Million 'Exhausted' And Displaced Syrians
UN High Commissioner for Refugees, Filippo Grandi, has urged greater international support for the more than 13 million Syrians who’ve been displaced in the past 10 years...More>>


>UN: Recent Kosovo-Serbia Tensions Could ‘Unravel Steady But Fragile Progress’

Tensions over vehicle licence plates and anti-smuggling operations, between authorities in Kosovo and Serbia, in recent weeks, may contribute to unravelling “steady but fragile progress made in rebuilding trust among communities” in Kosovo and Serbia...
More>>


Focus On: UN SDGs


UN: With Clock Ticking, Sustainable Transport Key To Global Goals
From electric cars and buses to zero-carbon producing energy sources, new and emerging technologies along with innovative policy changes, are critical for combating climate change. But to be effective, they must ensure that transport strategies benefit everyone, including the poorest... More>>


COP26: 7 Climate Action Highlights To Remember

A September to remember, a pivotal month for climate action commitments. From the United Nations General Assembly week to the final pre-COP meeting, last month was an important time to build momentum... More>>


UN: Global Leaders Set To Act To Increase Energy Access While Reducing Emissions At First UN Energy Summit In 40 Years

Significant new commitments for financing clean energy, increasing renewables and improving access to electricity are expected to be announced on 24 September at the UN High-level Dialogue on Energy... More>>