Limits on unsecured loans to be phased in over four years

SINGAPORE — Almost 20 months after plans to limit unsecured loans to 12 months of an individual’s monthly income, a lifeline was offered today (April 6) to consumers who had over-extended themselves: Instead of implementing the limit in one fell swoop in June as scheduled, the Monetary Authority of Singapore (MAS) would do so gradually over four years.

A limit capping borrowing to 24 times of monthly income will take effect in June. Two years later, from June 2017, the borrowing limit will be 18 times of monthly income. It will be tightened further to 12 times from June 2019.

Data from Credit Bureau Singapore showed that as of end-February, there are 32,000 borrowers with interest-bearing unsecured debt over 24 times their monthly income. This makes up two per cent of the total number of borrowers. The total amount owed by this group is S$4 billion, which is less than 0.2 per cent of total banking assets.

In comparison, there are 84,000 borrowers with unsecured debt over 12 times their monthly income. The total amount they owe is S$7 billion.

The MAS said it decided to give over-extended borrowers more time to adjust to the limits following feedback from the public, and further consultations with the Association of Banks in Singapore, and Credit Counselling Singapore.

Borrowers with annual income of S$120,000 or more, and those with net personal assets exceeding S$2 million will not be subjected to the borrowing limits. The caps will not affect unsecured loans for medical, business and education needs, as well as secured loans such as property and car loans.

Financial institutions (FIs) will not be allowed to grant further unsecured credit to an individual whose unsecured borrowings exceed the prevailing borrowing limits for three consecutive months. This means that, for instance, the FIs cannot grant new credit cards to the individual, or allow him to charge new amounts to his existing credit cards or increase credit limits.

In September 2013, the MAS gave advance notice of the 12 months’ income industry-wide limit which was to kick in in June this year.

Last month, Minister for Culture, Community and Youth Lawrence Wong, who is an MAS board member, told Parliament that the implementation timeline was being reviewed. He said that while the vast majority of borrowers will not be affected by the borrowing limit, others will need help and more time to adjust.

All the banks TODAY spoke to welcomed the phased approach, saying that it would give affected consumers more time to reduce their debts.

Nevertheless, Mr Roger Tan, chief executive officer at Voyage Research, noted that had MAS stuck to its original implementation schedule, banks would have to put in more resources for compliance. Referring to the longer list of borrowers who owe more than 12 times their monthly income in unsecured debt for example, Mr Tan said: “Operationally this could be very challenging and may incur a lot of resources.”

He added that unsecured credit facilities provide good margins for banks due to the higher interest rates of up to 24 per cent per annum, as compared to say, a home loan with interest rate of two to three per cent per annum, he said, “But the risk is also more, because it is unsecured. But if they default, of course the banks will do all they can to seize assets through court orders for example.” The amount of bad debt arising from credit cards that were written off represented 0.6 per cent of total credit card billings last year.

Ms Selena Ling, head of treasury research and strategy at OCBC, said she does not foresee significant financial impact on the banks as a result of the borrowing limits. “Overall, these are prudent measures, because we want people to take a cautious approach to debt, especially since interest rates will be rising over the next few years,” she said.