Over-extended borrowers get more time to cut back

THE Monetary Authority of Singapore (MAS) has released the number of over-extended borrowers in Singapore - 84,000 people who owe S$7.5 billion - as it moves to rein in the borrowing limit on unsecured debt.

The 84,000 over-extended borrowers make up 5 per cent of total unsecured borrowers and the amount they owe represents less than 0.4 per cent of the total banking assets of Singapore, MAS said.

The data on over-extended borrowers, defined as those owing unsecured debt of more than 12 times monthly income, was released on Monday as the MAS phases in the borrowing limit on unsecured credit facilities over four years.

Borrowers with unsecured debt of more than 24 times monthly income as at end-February number 32,000 who owe S$4 billion, which makes up 0.2 per cent of total banking assets.

This highly indebted group of 32,000 representing 2 per cent of total unsecured credit users, come June 1, 2015, will find their credit facilities suspended. "Their borrowings pose no risk to the banking industry," said MAS.

The financial institutions (FI) aggregate non-performing loan ratio is low, at 1.1 per cent as at end-December 2014, said MAS.

The phasing-in on credit card debt and other unsecured credit facilities over four years will give affected borrowers more time to bring down their debt. The new limit on the total amount of credit card and other unsecured debt that can be held will be implemented in phases.

From June 1, the limit will be 24 times monthly income; from June 1, 2017, the limit will be 18 times monthly income; and from June 1, 2019, the limit will be 12 times monthly income.

The borrowing limit does not apply to unsecured loans for medical, business and education needs. Borrowers with annual income of at least S$120,000 or those with net personal assets exceeding S$2 million are also exempted.

MAS said that the decision to give over-extended borrowers more time to adjust to the new measures comes after consultations with the Association of Banks in Singapore (ABS) and Credit Counselling Singapore (CCS), and feedback from the public.

In September 2013, MAS said that FIs will not be able to grant further unsecured credit to a borrower whose outstanding unsecured debt, across all FIs, is more than 12 times his monthly income for three consecutive months. The rule aims to help individuals avoid accumulating excessive debt.

Said Wong Nai Seng, MAS assistant managing director (policy, risk & surveillance: "All of us have to take active steps to manage our unsecured debts so that they do not become unsustainable. Most borrowers do not spend or borrow beyond their means, but some may need help to reduce their debts gradually."

The industry - made up of 12 banks and two card issuers - has come up with a repayment assistance scheme (RAS) to help the over-extended borrowers.

The RAS will offer a lower interest rate of 5 per cent per annum over a period of eight years to help over-extended borrowers. Unsecured credit borrowers typically pay between 15 and 24 per cent interest rates. Borrowers must apply for the RAS by Dec 31, 2015.

CCS will administer the RAS which cost S$3.5 million to set up, said Ong-Ang Ai Boon, ABS director.

Mrs Ong-Ang noted that the MAS policy affects paying customers - or to use industry parlance, borrowers who are "current", not defaulting ones. "That's why we are helping these customers," she said.

On how the industry arrived at the lower rate of 5 per cent, she said it was a consensus figure - "it's as best as we can give".

As for those who are exempted from the 12 times monthly income rule, and wondering if their banks might review their credit facilities, here's what some say.

"Prior to approving new credit lines, we always take into consideration the customer's existing financial commitments and his/her ability to make repayments," said a DBS Bank spokesman.

OCBC Bank's Desmond Tan, head of group lifestyle financing, said that customers with annual income of over $120,000 are exempted from the new regulations.

"That said, we have policies and processes in place to ensure that credit is given in a responsible manner. We will continue to exercise prudence in our credit management and work closely with our customers to ensure that they are not over-leveraged."

This article was first published on April 7, 2015.
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