Write-Off of Bad Debts for Micro, Small, and Medium Enterprises

Banking & Finance

21 Nov

Written By ARMA Admin

Authors

Authors

Aryo Baskoro

Partner

General Overview

This ARMA Update available in Bahasa Indonesia (Penghapusan Hutang UMKM)

As an embodiment of Article 250 and 251 of Law Number 4 of 2023 regarding Financial Sector Development and Strengthening (“Law 4/2023”), the government has issued Government Regulation Number 47 of 2024 regarding the Write-off of Bad Debts for Micro, Small, and Medium Enterprises (“MSME”) (“GR 47/2024”). Through GR 47/2024, the government seeks to improve financing accessibility for MSME by implementing a write-off of bad debts from both bank and non-bank financial institutions that are state-owned enterprises (“State-Owned Financial Institutions”) resulting from MSME financing.

In general, GR 47/2024 stipulates two types of the write-off of bad debts. First, write-offs of State-Owned Financial Institutions' loans to MSME through debt write-off and removal of bad debts. Second, write-offs of government loans to MSME, conducted through conditional and absolute write-off mechanisms. It is also important to note that GR 47/2024 is only valid for 6 (six) months from the date of its ratification which means it will be terminated on 5 May 2024.

Write-off of Bad Debts in State-Owned Financial Institutions

The write-off of bad debts in State-Owned Financial Institutions is carried out through two methods, namely bad debts write-off (penghapusbukuan) and bad debts removal (penghapustagihan). Further explanations regarding the differences between these two methods is provided in the table below.

	Write-off	Removal
Definition	The action of the State-Owned Financial Institution writing off bad debts from its statement of financial position up to the debtor or customer's liability, without waiving its right to claim from the debtor or customer.	The action of the State-Owned Financial Institution removes its claim against a debtor or customer after the write-off has been carried out.
Criteria	Bad debts have been restructured in accordance with the applicable regulations at the State-Owned Financial Institutions, and The State-Owned Financial Institutions have made optimal collection efforts, including through restructuring, but the debt remains uncollected.	Credit or financing for MSMEs that is part of a government program and funded by State-Owned Financial Institutions, where the program has concluded upon the enactment of GR 47/2024. Credit or financing for MSMEs outside government programs, where funding is provided by State-Owned Financial Institutions; or Credit or financing for MSMEs resulting from natural disasters as declared by the central government, local governments, and/or relevant authorities.

In addition, the provisions for credit or financing eligible for bad debts Removal are as follows:

The principal value of the bad debts does not exceed Rp500,000,000.00 (five hundred million rupiah) per debtor or customer;
Has been written off for at least 5 (five) years by the time GR 47/2024 comes into effect;
The credit or financing is not secured by insurance or credit guarantee; and
There is no collateral for the credit or financing, or existing collateral cannot be liquidated, or has been liquidated but does not satisfy the debtor’s obligation.

Write-off of Bad Debts by the Government

he write-off of bad debts by the government is carried out through two methods, namely conditional write-off (penghapusan secara bersyarat) and absolute write-off (penghapusan secara mutlak). Conditional write-off refers to the action of removing the state’s debts from the Central Government’s books without waiving the state’s right to claim. This conditional write-off applies to two types of debts. A further explanation regarding the differences between the two methods is provided in the table below.

Conditional Write-off of Revolving Fund (Penghapusan secara Bersyarat Dana Bergulir)

Conditional Write-off of Program Credit

(Penghapusan secara Bersyarat Kredit Program)

Definition

Bad debts from revolving funds distributed by work units that implement the financial management pattern of public service agencies for activities aimed at strengthening capital for MSMEs, including cooperatives that provide financing to MSMEs.

Program credit debts to MSMEs that have been completed and are sourced from the state budget (APBN), including the onward lending of foreign loans, two-step loans, and investment fund accounts.

Nominal

The principal value of the debt does not exceed Rp300,000,000.00 (three hundred million rupiah) per debtor.

The principal value of the debt does not exceed Rp300,000,000.00 (three hundred million rupiah) per individual debtor.
The principal value of the debts does not exceed Rp300,000,000.00 (three hundred million rupiah) per business entity debtor.
The principal value of the debts does not exceed Rp500,000,000.00 (five hundred million rupiah) per project (in cases where the debt value per debtor cannot be determined).

Criteria

It is carried out after the revolving fund debt is declared to have been managed optimally, which is stated as:

A statement by the State Debts Affairs Committee indicating despite optimal management, a residual debt remains; or
A statement by the minister, institution head, or work unit head confirming that the bad debt was optimally managed, yet the debtor remains unable to fulfill the obligation.

It is carried out after the program credit debt is deemed optimally managed, evidenced by a certificate from the program credit manager. This certificate may be issued if the debt meets the following requirements:

Collection efforts have been made;
It is recorded in the Central Government's Financial Statements;
The quality of the program credit debt is non-performing, in accordance with applicable regulations; and
The age of debt is at least 10 years.

Besides conditional write-off, the write-off of bad debts by the state also includes absolute write-off. This means the action of removing state debts after a conditional write-off, which also eliminates the state's right to claim. Thus, in line with the conditional write-off, the absolute write-off applies to revolving fund debts and program credit debts. It is important to note that the absolute write-off is carried out no earlier than three months after the decision for the conditional write-off is made, and no later than the expiration of GR 47/2024, which is 5 May 2025.

Disclaimer:
This client update is the property of ARMA Law and intended for providing general information and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. ARMA Law has no intention to provide a specific legal advice with regard to this client update.