Thursday, 16 January 2014

Individuals' total borrowings from moneylenders may be capped

By Hoe Pei Shan, The Straits Times, 15 Jan 2014

THE Ministry of Law is looking to clamp down on people who "over-extend" themselves by flitting between moneylenders to borrow cash.

As part of an ongoing review into the industry, it is considering introducing a cap on how much an individual can borrow, collectively, from all moneylenders in Singapore.

Following his Facebook post on the subject on Monday, Law and Foreign Minister K. Shanmugam yesterday re-emphasised the importance of reviewing how moneylenders are regulated, after concerns were expressed in the media "about people borrowing too much" and "credit being too freely available".

"If people need money, then they will try and find a way to borrow from someone," he said. "What the law can do is to try and protect vulnerable borrowers."

The ministry told The Straits Times it "is looking to put in place a limit on the total amount of unsecured loans that borrowers can take across all licensed moneylenders. This will ensure that borrowers do not over-extend themselves in credit".

There are more than 200 licensed moneylenders in Singapore, up from 173 five years ago. The proposed cap would align their loan policy with that of financial institutions.

Following new bank borrowing limits set by the Monetary Authority of Singapore last September, people whose unsecured debts total more than 12 months of their income for 90 days or more will be barred from receiving more credit from June next year.

Moneylenders have so far only been operating individually within income-specific loan limits. These are regulated by the Registry of Moneylenders, which comes under the Ministry of Law.

The most that moneylenders can give out is four months' income if a borrower's annual pay is $30,000 to $120,000, and two months' income if his annual pay is $20,000 to $30,000. For those earning less than $20,000, the limit is $3,000.

There are interest rate caps for those with an annual income below $30,000, and a minimum age of 18 years for borrowers.

However, according to Mr Lim Cheng Boon, head of counselling at Credit Counselling Singapore, these restrictions do not stop borrowers from seeking loans through several different moneylenders, meaning they can potentially incur huge debts.

"An overall cap across all lenders is better," he said, adding that with the new bank limits set to take effect next year, "there is also a worry more people will go over to moneylenders instead".

Noting that his organisation has counselled an individual who took loans from 41 different moneylenders, Mr Lim said a cap would be feasible only if there is "a centralised database or body to keep track of how much people are borrowing from different moneylenders".

A review of the licensed moneylending industry began in late 2012, the year the ministry introduced a suspension of the issuing of new moneylender licences which still stands today. More details of the ministry's plans are expected to be announced in the second quarter of this year.

Lending cap 'could drive borrowers to loan sharks'
Pros and cons to govt plan to limit total loans from moneylenders
By Hoe Pei Shan, The Straits Times, 16 Jan 2014

IMPOSING a cap on borrowing across all moneylenders could drive the business underground to loan sharks, say industry players.

Several managers of licensed moneylending outfits told The Straits Times most of their clients have loans from four to six other lenders on average and that a cap could, in theory, help rein in over-borrowing - or send them seeking cash elsewhere.

"Once people need money, they need money, that's it. There are banks, moneylenders, then loan sharks - that's just how it works," said Mr Henry Sem, director of Euro Credit.

"If people are limited too much in the moneylending sector, they will just go to loan sharks."

The Straits Times reported yesterday that the Ministry of Law "is looking to put in place a limit on the total amount of unsecured loans that borrowers can take across all licensed moneylenders" in an ongoing industry review.

This cap would "ensure that borrowers do not over-extend themselves in credit", said the ministry.

There are currently only income-specific limits for each loan, which do not stop borrowers from accruing larger debts by taking multiple loans from as many moneylenders as they can.

These are regulated by the Registry of Moneylenders, which comes under the Ministry of Law.

Though current data is not available, as of December 2012, total outstanding unsecured debt owed to moneylenders was less than 3 per cent of that granted by financial institutions.

Under the proposed cap, the collective amount borrowed by individuals from all 206 moneylenders in Singapore would be limited, and loans would likely be tracked in a centralised database.

The key lies in drawing the limit at a "reasonable amount, based on a borrower's income" so as not to push someone desperate for cash through the back door, said another moneylending manager.

"The regulators will have to ensure the cap isn't set too low, consult businesses on the ground and structure it such that it is similar to the bank limits set by the Monetary Authority of Singapore," he said.

He was referring to new bank borrowing limits announced last September where people whose unsecured debts total more than 12 months of their income for 90 days or more will be barred from obtaining more credit from June 2015.

Though moneylenders estimate the loan default rate to be 25 to 35 per cent, including those who pay back some of their loans, borrowers too are against having their loans from moneylenders further limited, tracked and recorded.

A 50-year-old electrician who wanted to be known only by his first name, Donny, said he regularly takes loans amounting to $20,000 yearly from moneylenders to supplement his $50,000 annual income.

"I don't go to banks because they are stricter in checking records, whereas with moneylenders, if I don't get my loan from one, I just go to another. If moneylenders start checking records, I may go somewhere else."

He has not defaulted on payments, he said.

Another borrower, a construction site supervisor who identified himself only as Lawrence, said he has existing loans with 10 moneylenders for amounts between $500 and $1,200, and is worried he might easily bust an overall cap.

He said: "A cap is good and bad - good for routine needs but bad for emergencies. I can't go to banks, they are too strict, so in cases of urgent need, how?"

Mr Lim Cheng Boon, head of counselling at Credit Counselling Singapore, said: "A cap may restrict borrowing in the short term, but it's helping them in the long run to cope better with financial commitments."

More details of the ministry's plans are expected to be announced in the second quarter of this year.

But moneylenders are already bracing themselves for business to be hit hard by the proposed cap as "the borrowers' incentive to go to as many moneylenders as possible would no longer be there, and it would become a case of the first moneylender winning", said one, who wanted to be known only as Mr Voo.

Still, the consensus is that consolidating the industry would benefit their risk assessment of clients, which, in turn, could allow them to offer more competitive interest rates for certain borrowers.

"Right now the business is founded very much on trust, and there is no comprehensive way to verify a client's borrowing history - we just have to take his word for it," said Ms Guo Si Qi, the director of Synergy Credit. "It would be good to centralise the borrowing data so we can do proper checks on their risk profiles."

Need for centralised loan database: Minister
Info on a person's total moneylender debt will help Govt to regulate sector
By Hoe Pei Shan, The Straits Times, 20 Jan 2014

SINGAPORE needs a centralised database which can track how much a person has borrowed in total across moneylenders, said Law Minister K. Shanmugam.

This will help the Government when crafting regulations for the sector, which has come under scrutiny. Information on moneylender loans is now not consolidated, and records are often just based on what borrowers choose to reveal about their loan history.

This has to change, said Mr Shanmugam.

"We need a system where we have a centralised place where we know exactly who has borrowed how much," he said yesterday on the sidelines of a community event in Chong Pang.

"Consolidation of data is one of the things we're going to try and achieve", and it is only with centralised records that the ministry can better evaluate how overall borrowing in moneylending can be regulated, he explained.

Speaking to The Straits Times yesterday, Mr Shanmugam gave details of his ministry's proposed cap on overall borrowing, which would align the sector's regulations with those of banks.

Last September, new bank borrowing limits were announced - starting from June next year, people whose unsecured debts are more than 12 months of their income for 90 days will be barred from getting more credit.

Worries about easy loans were sparked following recent reports on the number of licensed moneylenders setting up shop in the heartland.

Following further reports last week in The Straits Times about a possible government cap on how much a person can borrow from moneylenders, the industry raised concerns about where the limit would be drawn.

Some moneylenders said that too tight a limit could push people to loan sharks.

Mr Shanmugam said that "no position has been taken" yet on where that line resides, but the ministry is "doing a study" and "trying to judge" where best to draw the limit.

"We will take into account the industry's views, not just moneylenders but others as well, such as Credit Counselling Singapore, and we will also look at the way the Monetary Authority of Singapore is coming up with regulations on financial institutions," said Mr Shanmugam.

He added that more details on the cap would be available "in due course" as the study would "take some time".

Be fair to borrowers and lenders

MONEYLENDERS are proliferating in many HDB neighbourhood town centres - testimony to the existence of many low-income people who lack financial means and adequate savings to tackle emergencies and unexpected shortfalls ("Lending cap 'could drive borrowers to loan sharks'"; last Thursday).

A distinction must be made between borrowers who can repay the loans and those who have no capacity to do so.

The latter often have unsustainable lifestyles and take on debts that can only escalate; they need to be prevented from harming themselves.

Moneylender loans are usually small and repayable over a couple of months, with weekly instalments.

The main profits for moneylenders come from penalty and overdue charges as well as administration and collection visit fees. For example, moneylenders can make several daily collection visits at $50 or more per trip.

It is not surprising that many moneylender loans are designed to fail as borrowers receive their salaries only monthly.

Defaulting borrowers are then subject to hefty charges and often directed to other moneylenders. As a result, they end up with more debts.

We must cap the total amount of loans that can be obtained from moneylenders to prevent over-borrowing and exploitation of this vulnerable group.

This requires a database to monitor total debts. We could make use of the existing credit bureau infrastructure or have the Government set up such a facility.

We should also limit the charges that can be levied on defaulters. We recognise this is a high-risk group. Borrowers may take advantage of the inability of moneylenders to take legal action to recover small loans, and will respond only to pressure and fear of punitive charges.

However, we should strive for a balanced situation that is fair to both borrowers and lenders.

Lastly, there is a pressing need to regulate the activities of debt collectors. Creditors have increasingly outsourced collection efforts to external agencies, and it is largely an unregulated industry.

There are stories of debt collectors harassing and intimidating borrowers at unreasonable hours during the day and night. People have lost their jobs as a result.

Legislation may be the answer to put a stop to such unscrupulous activities.

Kuo How Nam
Credit Counselling Singapore
ST Forum, 21 Jan 2014

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