Financial associations and banks have welcomed new measures to help borrowers avoid racking up excessive unsecured debt.
The new ruling, which kicks in on Jan 1, is aimed at borrowers with unsecured debt like personal loans or red ink on a credit card that exceeds six times their monthly income.
It effectively draws a line in the sand by preventing any increase in credit limits or any new unsecured credit facilities that push debt above 12 times their monthly income.
Mrs Ong-Ang Ai Boon, director of the Association of Banks in Singapore, said: "This new policy should help customers not to further ramp up their indebtedness."
Ms Jacquelyn Tan, United Overseas Bank's (UOB) head of personal financial services Singapore, said it will encourage financial prudence and help consumers spend only within their means.
This is how the new measure works. Take, for instance, a person who earns $4,000 a month with unsecured debt of $26,000, or 61/2 times his monthly income. Assume also that he already has an unutilised credit of $14,000 or 31/2 times his monthly income, which adds up to a total credit limit of 10 times his monthly income. That means he can apply only for additional unsecured credit up to two times his monthly income, or $8,000.
On the other hand, consider a person earning $5,000 a month with debts of $40,000, or eight times the monthly income. Assume he has an unutilised credit of $25,000, or five times his monthly income. That makes a total credit limit of 13 times the monthly income, so he would be unable to get additional unsecured credit from a bank.
Mr Kuo How Nam, chairman of Credit Counselling Singapore, said the new rule is a pre-emptive measure taken by the Monetary Authority of Singapore. The cap on utilisation is already being implemented progressively, he added.
Banks like DBS Bank and UOB say they are supportive of the initiative as it helps consumers to manage their finances better.
Mr Anthony Seow, DBS' head of cards and unsecured loans, said it does not foresee much impact as only a small percentage of customers will be affected by the change.
The credit limit does not apply to secured loans such as property and car loans, and unsecured loans for business, medical spending and education.