Editorial: Banking Law must be amended

Wed, Jan 17, 2007 - Page 8

The scandal surrounding the Rebar Asia Pacific Group (力霸亞太企業集團) and the ripples it has caused in the nation's financial world has led many people to wonder just how many other financial scandals await.

Article 48 of the Banking Act (銀行法) protects the identities of people who default on their loans. Many debtors try honestly to turn their financial situation around. But there are without a doubt many others who intentionally abuse banks and run up debts.

Dealing with this will be a difficult task.

Confidential account information provided to the legislature's Finance Committee by the Financial Supervisory Commission says that by November last year, 633 bank branches had more than NT$100 million (US$3.1 million) in bad loans. The total amount of bad debt reached NT$172.3 billion and the largest single account was as high as NT$2.83 billion. These bad accounts were concentrated among a small minority of customers.

Recent developments have brought the Banking Law into focus and some pundits say it should be amended to allow names of bad debtors to be made public. However, there is concern that this would adversely affect the economy by putting too much pressure on honest companies that are struggling with their finances but working hard to pay debts. Some fear that this could lead to companies collapsing and increase unemployment.

But if the government takes an indifferent attitude, this will result in similar financial scandals.

Rebar originally requested financial assistance from the government to help it when the economy was sluggish. But after the economy's revival, Rebar did not pay back its debts. Instead, company heads set up phony subsidiary companies to get more loans from The Chinese Bank through complex financial manipulation.

When in power, the Chinese Nationalist Party (KMT) made a habit of providing unrestricted and privileged loans to businesses. Although the Democratic Progressive Party government has been striving to solve the problem of bad business loans, it has failed to implement a timely policy to correct the situation.

The government delayed handling the Rebar issue, which has now snowballed into a more serious problem. Avoiding similar problems in the future will require a lot of work.

Banks should certainly keep client information confidential under normal circumstances. But to prevent mishandled debts from affecting others and to maintain order in the economy, bad loan information should be an exception. Banks should be authorized to disclose such information under certain conditions.

When a company falls into dire financial straits, it has approximately six months to negotiate with banks before the overdue loans turn into bad loans. If it is sincere about debt repayment and is fundamentally sound, banks will naturally give it a second chance.

If the legislature refuses to face reality and amend the Banking Law, bad companies will continue to be able to misbehave in the name of privacy and dishonest businessmen will be able to use the loophole to expand debts.

The economy is an organic environment. New companies appear and old ones disappear all the time. The government's responsibility is to take a hands-off approach as far as possible and let market forces operate. To this end, the law needs to develop a neutral mechanism in which bad debtors can be identified.