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