Personal Bankruptcy Woes

Economic News

22 Jul 2010
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This week the Bankers Association of Taiwan called on lawmakers to amend the proposed new personal bankruptcy law saying it would encourage credit abuse in the mortgage sector.



Last month the bill was initially passed by the Legislative Yuan Finance Committee in its first reading and negotiations between the parties are taking place before there will be a second reading.



Currently the bill allows consumers who have unsecured debts of over $360,490 and who are unable to pay them back, to apply for "rehabilitation."



According to the local press, the Bankers Association's biggest concern is that debtors who are deemed to be in rehabilitation would be required to pay back only the interest on their mortgages for a ten-year period. They would be able to do this without the fear that their property would be put up for auction by the bank issuing the mortgage.



The lawmakers who included this in the bill argue that it protects consumers' right to housing.



The association would like a two-year "sunrise" clause that would allow the government enough time to train staff dealing with applications and would also allow the industry to educate the public.



Spike Wu, chairman of the Consumer Finance Unsecured Debt Restructuring Program Committee, which is part of the association, said, "We're not against the enactment of such a law. But some articles should be removed and complementary measures should be included to ensure financial stability." Wu said he does not want the bill to include secured loans as he feels this will increase mortgage credit abuse.



The committee was established in January 2007 to help consumers with debt repayment issues. It was set up after the debt relief mechanism was phased out last year. The local press reported that 270,000 people applied for debt bailout last year. So far, the committee has received 12,000 telephone calls asking for advice.



Another committee member, Justin Lee, explained that if mortgages were included in the bill, banks would need to set aside contingency funds to underwrite any abuse, which would hurt their return on equity. The bill does not stipulate the amount banks would need to put aside but doing so would put banks under more pressure in a very competitive, "over-banked" market. There are currently over 40 banks for a population of 23m.



Meanwhile, the government is encouraging consolidation in the market and is prepared to take action over failing banks. On May 7, the chairman of the Financial Service Commission (FSC), when answering questions in the Legislative Yuan's Finance Committee, said the commission will ask 12 banks in Taiwan to submit their plans to add more funds to increase their capital. According to an amendment to the banking law passed in March, any bank that has losses of more than one third of its capital must report their situation to the FSC, which will order an injection of fresh capital. If the banks fail to find the extra capital then the government would take them over. Although this would mean more government ownership it would reduce the number of banks in the market, which is a goal of the government.



According to Taiwan Rating Corporation (TRC), a subsidiary of credit rating agency Standard & Poor's, in reports issued at the beginning of the month, Taiwan's banks will face another tough year. An analyst at TRC, Susan Chu, said, "At best, the profitability of Taiwan's banking sector will be moderate in 2007." The report explained that in 2006 banks lost money from widespread unpaid credit card debt and that in 2007 the slow speed of consolidation is one reason why the market will continue to remain tough.



As banks are already suffering from difficult conditions, including a very crowded market, there is a concern that the new bankruptcy law could harm their profitability further. The plan for the FSC to make banks increase their capital as well as their resolve to take over the ones that fail to do so, shows that the government is trying to encourage consolidation, which could go a long way to improving the profitability of banks in Taiwan in the long term.

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