Banks' role in rise of household debts should not be ignored

SINGAPORE - One week after ratings agency Moody's downgraded its outlook on Singapore's banking sector from "stable" to "negative", mainly on account of mounting household debt, the Monetary Authority of Singapore (MAS) voiced its gravest concern yet about debtors who over-extend themselves: one in 10 borrowers here are mortgaged to the hilt, and the combination of low interest rates, growing leverage and surging property prices poses "significant risks" to Singapore's financial stability, the central bank said last week.

New data from Credit Bureau of Singapore this week reinforces the sombre picture of a society living on debt. Singaporeans are taking up bigger loans and many of them are saddled with multiple loans. The red flag has in fact been raised more than a few times over the past 10 months.

An October 2012 Department of Statistics paper on the household sector balance sheet noted that growth of household debt has outpaced that of household assets since the second quarter of 2011, though the liabilities- to-asset ratio remained low at about 16 per cent during the period.

A month later, MAS sounded a precautionary note in its financial stability review about households falling vulnerable should interest rates rise or job prospects weaken. "The growth of household credit warrants close monitoring and careful management by lenders," it said.

Various economists have also chimed in about the risks of an emerging credit bubble in Asia, given the rise in lending across the region, not least in Singapore where household liabilities, tied mostly to property, have surged to about three-quarters of GDP.

But, with banks readily dangling easy credit offers, urging people to "Get Cash For That Dream Holiday Or Big Purchase Instantly. Apply Now!", all the warnings about the dire consequences of becoming over-stretched would, in many cases, fall on deaf ears.

MAS did right to step in to enforce financial prudence with a series of measures of late: it proposed new tough rules on the use of credit cards and unsecured credit, introduced curbs on vehicle loans and then capped, for property loans, a borrower's total debt servicing commitments at 60 per cent of income. With housing loans accounting for 80 per cent of household debt in Singapore, and with the possibility of US interest rates rising in about a year's time, from near-zero levels now, it is not too soon to begin to rein in excessive borrowing.

But while the onus is on individuals to be prudent, the banks' role in the rise of individual indebtedness should not be ignored. Like any other business, banks exist to make money. And market conditions over the last four years have led to a dog-eat-dog battle for borrowers - sometimes regardless of their financial background.

While it is proper that consumers should exercise restraint, banks too should rely less on the consumer sector - property loans in particular - for the health of their bottom lines.

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