Tighter limits on credit card debt to be phased in

New rule to take effect over 4 years; heavy borrowers offered a lifeline
By Rachael Boon, The Straits Times, 7 Apr 2015

MOST people here drowning in heavy credit card debt - and other unsecured loans - will be given more time to get their finances in order before new rules kick in.

The Monetary Authority of Singapore (MAS) has relaxed a June 1 deadline designed to stop people battling unsecured debt from adding to their loan burden.

Unsecured loans do not require collateral.

Under the new timeframe, the rules will come in over four years, with only the most heavily indebted people affected from June 1.

Also, a new scheme has been unveiled to help overextended borrowers get back into the black.

The MAS said yesterday the decision to give most overextended borrowers more time comes after consultations with the Association of Banks in Singapore (ABS) and Credit Counselling Singapore (CCS), and public feedback.

Mr Wong Nai Seng, MAS' assistant managing director of policy, risk and surveillance, said yesterday: "Most borrowers do not spend or borrow beyond their means, but some may need help to reduce their debts gradually."

In 2013, MAS announced that all unsecured creditors would face new rules from June 1 this year.

But in a revised, graduated timeframe, from June 1, those with total unsecured debts above 24 months of their monthly income for more than 90 days will not get more unsecured loans.

Then, from June 1, 2017, those with total unsecured debts of more than 18 times their monthly income will be affected, and from June 1, 2019, those with total unsecured debts of more than 12 times will see the rule kick in.

Only a small proportion of borrowers here are overextended.

Data from financial institutions and Credit Bureau Singapore shows that as of February, 32,000 borrowers had total interest-charging unsecured debts above 24 times their monthly income.

They make up 2 per cent of the total unsecured-credit borrowers, and their borrowings pose no risk to the stability of the banking industry here. The total non-performing loan ratio for financial institutions is low at 1.1 per cent as of December last year.

Including them, people with total interest-charging unsecured debts of more than 12 times their monthly income made up about 84,000, or 5 per cent, of unsecured borrowers.

The ABS, leading retail banks and card issuers yesterday announced a Repayment Assistance Scheme (RAS), set up to help borrowers reduce their unsecured debts over time. The scheme lets those with debt exceeding 12 months of their monthly income pay it down at a lower interest rate of 5 per cent a year and over eight years. The CCS will coordinate the scheme.

ABS director Ong-Ang Ai Boon urged "highly indebted borrowers" to take up the repayment assistance scheme, and said borrowers have to apply for it by Dec 31.

Eligible borrowers need to be Singaporeans or permanent residents earning under $120,000 a year and prompt in making monthly unsecured loan repayments.

CCS president Kuo How Nam said many racked up debt by overspending on luxury goods or lifestyle wants, and needed to make lifestyle changes.

Well-educated, well-paid, but mired in debt
By Rachael Boon, The Straits Times, 8 Apr 2015

A TERTIARY education, average or even above-average income but crushing credit card or other unsecured debt of at least two years' worth of annual pay.

That is the typical profile of an estimated 32,000 people in Singapore who are affected by new rules on unsecured debt - that is, debt with no collateral.

The rules will be phased in over the next four years rather than implemented all at once, the Monetary Authority of Singapore (MAS) announced on Monday.

But from June 1 this year, these most heavily indebted of borrowers will be prevented from adding to their loan burden.

Data compiled by financial institutions and the Credit Bureau Singapore show that as of February, 32,000 borrowers had total interest-charging unsecured debts above 24 times their monthly incomes.

Most of these heavily indebted borrowers have tertiary education qualifications - a diploma or higher - with incomes above or around the median income.

Credit Counselling Singapore president Kuo How Nam said that last year, he saw a high-earning borrower with an unsecured debt of $1.8 million.

"We successfully restructured a repayment plan for him and things are all right now."

The 32,000 make up 2 per cent of the total number of unsecured-credit borrowers, but their borrowings pose no risk to the stability of the banking industry.

Including these borrowers, those with total interest-charging unsecured debts of more than 12 times their monthly income made up about 84,000, or 5 per cent, of unsecured borrowers.

These figures are up from those released in October last year, when Deputy Prime Minister Tharman Shanmugaratnam said about 3 per cent of unsecured borrowers have debts exceeding their annual incomes.

Since the new MAS rules were announced in September 2013, financial institutions and credit bureaus have been enhancing their systems to capture more comprehensive and updated data - and 5 per cent is the updated figure.

The revised, graduated timeframe for the new rules will also mean that from June 1, 2017, those with total unsecured debts of more than 18 times their monthly income will be affected.

And from June 1, 2019, those with total unsecured debts of more than 12 times will see the rule kick in.

Once the borrowing limits start, an affected borrower will not be able to charge new purchases to his credit cards or apply for new cards, for instance.

Loans for medical, education or business purposes do not count towards the borrowing limit.

Mr Kuo said besides overspending on lifestyle wants, another major reason for falling in debt is job-related.

"For example, a spouse could have lost a job. Another 20 per cent to 30 per cent make stupid investments, lend money to friends or pump funds into failing businesses."

He added that another 20 per cent to 25 per cent cite gambling as a reason, and that people fall into debt because of multiple reasons, not just one.

Confront debt instead of borrowing more: Experts
More breathing space for debtors but they need to 'make lifestyle changes'
By Chia Yan Min, The Straits Times, 7 Apr 2015

A FEW overstretched borrowers might turn to licensed moneylenders or even loan sharks in response to tighter limits on credit card and other unsecured debt, financial advisers warn.

However, they urge people in dire straits to confront their debt head-on, instead of digging themselves in deeper by borrowing even more.

The Monetary Authority of Singapore (MAS) said yesterday that it will phase in a tighter limit on credit card debt and other unsecured credit facilities - relaxing plans to implement all the rules from June 1. The aim is to give affected borrowers more time to reduce their level of debt.

Under the new timeframe, the rules will come in over four years, with only the most heavily indebted people affected from June 1.

The gradual phase-in will cushion affected borrowers from being hit too hard, and "will allow people to continue to borrow without being too badly impacted", said Mr Christopher Tan, chief executive of financial advisory firm Providend.

However, Mr Tan noted that most unsecured loans - such as credit card borrowing - are for spending on "lifestyle items" and not necessities.

"In the first place, (indebted borrowers) should not be leading that lifestyle," he said, adding that Singapore is "increasingly becoming a debt-driven society".

Mr David Poh, president of the Moneylender's Association of Singapore, said the industry might see an uptick in demand as a result of the new rules, as borrowers who have maxed out their credit from financial institutions often turn to licensed moneylenders "as a last resort".

However, licensed moneylenders have their own set of criteria when assessing the credit worthiness of potential borrowers, he said.

"If a borrower is already in too much debt, they might not be able to repay the loan," added Mr Poh.

Credit Counselling Singapore president Kuo How Nam said that while there might be borrowers who are driven to obtain loans from licensed moneylenders and even loan sharks as a result of the tighter credit rules, "it is a question of choice".

"If they carry on with their profligate ways and don't want to face up to reality, they will end up digging a bigger hole for themselves. The bigger the hole, the harder it is to get out of it," said Mr Kuo.

Even without the limits imposed by the MAS, "(these borrowers) are likely to still go down the same road", he added.

"The only real solution is to realise that it's self-destructive, and make lifestyle changes."

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, said the MAS move is timely, given the ease of making payments with credit cards, and the fact that some people hold credit cards from multiple banks.

Maxing out their credit with every bank would "overload them with debt", said Mr Chia, who gave the example of a client with $500,000 worth of credit card debt, mainly as a result of interest compounding.

"The limits announced by MAS will act as a check and balance and restrain people from borrowing beyond their means."