Budget backgrounder: Licensed moneylenders
Published on Mar 5, 2014 8:00 PM
Licensed moneylenders and borrowers are expected to come under stricter rules, said Senior Minister of State for Law Indranee Rajah during the ministry's Committee of Supply debate in Parliament on Wednesday.
We look at the moneylending sector, and the existing rules governing these businesses.
What may change
Some of the changes being considered include:
- setting up a central credit bureau to track how much a person has borrowed in total across moneylenders;
- reviewing the interest rate cap and fees charged by licensed moneylenders;
- whether there is a need to restrict the number of moneylenders in a given area
Why the need for change
The recent phenomenon of licensed moneylenders setting up shop in heartland areas such as Toa Payoh and Ang Mo Kio has triggered concerns about the availability of easy credit. In Toa Payoh, for instance, some 16 credit companies have set up shop in the town centre, up from just two in the entire estate in 2009. In the past, they used to operate from areas such as Chinatown and Beach Road.
The number of complaints against licensed moneylenders has also increased over the years.
What are the existing rules
“Individual” limit exists, but no “universal” loan cap
- Currently, there is a limit on how much an individual can borrow from a moneylender. The maximum 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.
- But there is no overall cap on the total amount an individual can borrow, collectively, from different lenders.
- Imposing industry-wide borrowing limits will align the sector’s regulations with those of banks. Under new bank borrowing limits that will kick in 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.
Cap on interest rates, but late payment fees apply
- For borrowers earning under $30,000, the rate lenders can charge is legally capped at an effective interest rate of 13 per cent for secured loans and 20 per cent for unsecured loans.
- But for loans made to individuals who earn over $30,000 a year, the interest rate is negotiable between borrower and lender.
- In recent years, the Government has introduced stricter rules to rein in high interest rates charged by licensed moneylenders. Under new rules introduced in 2012, lenders are required to use effective interest rates instead of nominal interest rates. This means borrowers will know exactly how much interest they will pay a year.
- They are also not allowed to charge certain fees, such as payment for accepting a loan application.
- Borrowers, however, may still incur additional costs, such as late payment charges. For example, if a borrower opts for weekly repayment instalments and defaults on payment for one month, he will face four late payment charges.
No geographical quotas
- There are more than 200 licensed moneylenders in Singapore, up from 173 five years ago. There is no restriction on the number of moneylenders who can set up shop in a given area.
- Some have argued that geographical quotas may not be effective in a small country like Singapore because travelling costs may not deter borrowers from going to moneylenders in different locations.
- But concerns over the recent phenomenon of moneylenders targeting heartland areas such as Toa Payoh and Ang Mo Kio have sparked calls for some form of control.