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Keeping tabs on our financial health

This story was first published in The Straits Times on Oct 1, 2013

Many people in Singapore go for regular health check-ups to ensure their bodies are in tip-top shape.

But not as many keep tabs on their financial health and creditworthiness, although they should.

This is especially since credit cards and other unsecured debt facilities have become the latest segment of the loans market here to come under tighter rules.

Changes announced last month by the Monetary Authority of Singapore (MAS) will, among other things, require banks to conduct more regular credit checks and disclose to borrowers how dramatically their debt may spiral if left unpaid.

Banks will also have to deny a borrower further credit if he falls behind in repayments or has already taken on too much debt.

Industry players have supported the moves, saying they will make bank lending more prudent and prevent overstretched consumers from sinking further into the red.

Indeed, the rules are so intuitively sensible that some market watchers and previously wayward borrowers have even wondered why they took so long to be introduced, and whether they can be implemented sooner than currently planned.

Some have also questioned if the regulations should go a step further to prevent borrowers from taking on too much debt to begin with, rather than cutting them off once they are already underwater.

Quicker implementation

The new MAS curbs on unsecured credit are the latest in a series of macroprudential measures to rein in excessive borrowing and encourage prudent lending ahead of expected interest rate hikes.

But while the earlier rules to tighten lending for homes and cars were imposed immediately or soon after they were announced, the regulations on unsecured debt are slated to take effect in stages from December this year to June 2015.

A case in point is a new rule requiring financial institutions to review borrowers' outstanding debt and credit limits before making any new unsecured loans, which would help banks better assess a borrower's creditworthiness.

This requirement is slated to be mandatory from June 1 next year - a good eight months away - even though a similar requirement to check on a home loan applicant's total debt was introduced in June with immediate effect.

Another new requirement is that financial institutions must conduct credit bureau and income checks before increasing a borrower's credit limits. This is scheduled to kick in on Dec 1 this year, but there seems little reason not to implement it now given that the information is already available.

Anecdotally, borrowers The Straits Times spoke to have said such checks should have been imposed long ago.

They said banks have offered to either raise their credit limits for their current credit cards or give them new unsecured facilities, despite the fact that they already had significant outstanding debts.

Another common grouse among borrowers is that they do not always realise how quickly their debt will mount if they fail to pay back the full sum of their credit card bills.

The MAS is addressing that with a new rule that requires banks and card issuers to state the total amount and time needed by borrowers to fully pay off their debts if they pay only the minimum each month, and how much that debt would rise to if no payment is made over the next six months.

This will kick in on June 1, 2015 - giving today's borrowers 20 months to watch their debt spiral without having a clearer picture of repayment implications.

Of course, these additional processes will tax financial institutions' resources. Time may therefore be needed for them to comply with the new rules.

Still, it is in the interests of both banks and borrowers that the delay in implementation be minimal, especially since the new procedures all seem to be fairly straightforward and should yield immediate prudential benefits.

Faster intervention

One criticism of the new rules is that they appear to allow borrowers to rack up huge debts before any intervention takes place.

For example, banks will soon have to deny further lending to borrowers who have owed, for 90 days or more, total credit card and other unsecured debts exceeding 12 months of their income.

But there is nothing to stop a consumer from chalking up debt that amounts to, say, two years' worth of income in the first place. Only if he fails to pay down that debt sufficiently within 90 days will his line of credit be cut off.

And even then, he has that 90-day window in which to pile up even more debt before the tap is turned off.

These weaknesses in the new rules were spotted by credit ratings agency Moody's, which noted that the onus would still be on individual banks to check on a borrower's credit situation and make a call about whether to grant him more debt if he is already in over his head.

There is also the question of why the MAS chose to draw the line of excessive debt at 12 months' income for 90 days, aggregated across all banks. In the original consultation paper, the boundary had been set at debt worth two months' income for six months or more, although that was for a borrower's debt at any one single bank.

The MAS has said it chose the 12-month limit after consultation with stakeholders as "there are some borrowers who rely on significant amounts of unsecured borrowings". It added that it will monitor the situation and may lower the limit if necessary.

But it is precisely the borrowers who are over-reliant on unsecured financing that need the most protection with these new rules. Deciding on a borrowing limit for them based on what is current practice may negate the benefits of the tighter rules.

A fuller picture

There is always the worry that if desperate borrowers are restricted from bank credit, they may turn to other sources of financing not regulated by the MAS.

These include licensed moneylenders or pawnbrokers, both of which fall under the Ministry of Law's purview rather than the MAS'.

According to the Law Ministry, the average annual value of loans given out by licensed moneylenders over the past five years is about $350 million. For pawnbrokers, the average annual amount is about $3.7 billion.

Overall, the amount of loans disbursed by licensed moneylenders and pawnbrokers constitute less than 4 per cent of the consumer credit market. With the new curbs on financial institution loans, however, this share may grow unless the same restrictions are extended to this segment.

That is why the next vital step in encouraging prudent consumer borrowing is to close this regulatory loophole. As it stands now, there is no centralised cross-agency database that gives a full picture of an individual borrower's debt from various sources.

The Law Ministry has told The Straits Times that it is working towards a centralised system for moneylenders to check on a borrower's debt. It is also planning to implement caps on moneylender loans similar to those introduced by the MAS for banks.

These are commendable steps that will help regulators develop a better profile of Singapore borrowers. They could use the information to go further and find out why people turn to such loans, and whether their borrowing needs can be better met by more innovative and cheaper facilities.

Compared with other types of debt such as housing and car loans, unsecured credit does not pose as much of a risk to Singapore's banking system. Research house OSK-DMG noted that credit card receivables accounted for only 1 per cent of total banking loans. Consumer loans categorised as "others", like unsecured, education and renovation loans, made up 7 per cent.

But with consumers relying more on such unsecured credit, it is prudent to nip any potential problem in the bud. The average monthly credit card/unsecured overdraft balance per consumer rose to $8,030 in July this year, up from $7,253 five years ago.

Singapore's regulators are taking steps in the right direction to pre-empt any rise in bad loans from unsecured credit. But their strides forward could be faster, bigger, and more comprehensive.

feimok@sph.com.sg

This story was first published in The Straits Times on Oct 1, 2013

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