Much concern has been expressed over the increasing number of foreign domestic workers borrowing from licensed moneylenders (Higher Interest charges with change in Moneylending Act, by Dr Cheong Foong Soon; Nov 27).

Under changes to the Moneylenders Act, aggregate loan caps will be set to limit the amount that Singaporeans, permanent residents and foreigners residing here can borrow from all licensed moneylenders combined.

Foreigners residing here earning less than $10,000 are restricted to an aggregate loan cap of $1,500, which should limit their ability to incur too much debt.

Are moneylenders making excessive profits from the present monthly interest charge of 4 per cent and late payment charges?

We need to understand the dynamics of the moneylending business.

Moneylender loans are typically only a few hundred dollars and are short term in nature, usually not more than a few months. Given a loan of $500, interest charges for three months will amount to only $60. This amount must cover the costs of assessing credit, loan administration and collection.

When repayments are late and overdue, there are additional costs of reminders, letters, phone calls and visits.

There are also higher loan losses as there is practically no legal recourse available to enforce the repayment of small, unsecured amounts.

Loans to foreign domestic workers in particular would be much riskier.

Therefore, it is simplistic to extrapolate a per annum rate and look at the charges relative to a small loan amount.

One can, of course, question if people should borrow from moneylenders in the first place.

Low-income earners need access to quick, fast credit to meet unexpected expenses or to cater to a shortfall before their salaries are paid. Some reasons they might need the cash could be to meet medical expenses, education fees or for motorcycle repairs.

They are excluded from normal bank credit and have no savings to fall back on.

Many studies have shown that if they were to be totally excluded from borrowing, the outcomes can be more unfavourable - they may turn to loan sharks.

Kuo How Nam