Debt Accumulation

Mdm Speaker, in September this year, MAS introduced a limit on an individual's total unsecured debt across financial institutions. This new limit will come into effect in June 2015. So, we are giving it some time to be phased in. We set the limit at 12 months' income for a start, so as to give borrowers who are already over-leveraged time to adjust. For instance, according to Credit Counselling Singapore, the average debt level of individuals seeking its help exceeds 24 months of their income. MAS expects financial institutions to work actively with their affected customers to take steps to bring down their unsecured debt levels. MAS will monitor the situation and is prepared to lower the limit over time if necessary.

The 12-month limit is, however, not the only safeguard against borrowers accumulating too much debt. We also introduced other policy changes for credit cards and unsecured credit facilities in September, which take effect progressively from December this year. So, they kick in earlier. One of the key changes is to require financial institutions to review a borrower's total debt and credit limits with all financial institutions before granting a new credit card or unsecured credit facility, or increasing the credit limit on such facilities. This will ensure that financial institutions do not extend unsecured credit to an individual beyond the limit of 12 months income. So, we are taking some time to bring into effect the rules for existing borrowers, some of whom are significantly over extended, but when it comes to new facilities and new loans, the effect of our new rules is to start helping them early.

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Ultimately, everyone has to take personal responsibility for their own finances, and not get into debt-servicing obligations that leave them with little buffer in their incomes. The MoneySENSE national financial education programme has stepped up its education of consumers on factors to consider before taking on debt.

Mdm Speaker, I thank the Deputy Prime Minister for his comprehensive response. I have three supplementary questions. One, given the implementation date of the aggregated debt limit for unsecured loans of 12 times income will only take place 1 June 2015, how can we prevent individuals from chalking up huge debts to well beyond the 12 times income rule?

Secondly, if all the banks decide to call on lines on customers that exceeded the 12 months' aggregated debt limit come 1 June 2015, what is the risk of a credit crunch in the industry or forced bankruptcies on vulnerable borrowers? Would the Minister allow "grandfathering" of existing cases?

Thirdly, how can we prevent individuals from turning to alternative sources of financing, such as moneylenders or pawnbrokers, which usually charge higher rates or tougher terms and are currently not regulated by MAS? There is no centralised cross-agency database that gives the full picture of an individual borrower's debt from the various sources. How can we ensure on an aggregated basis – both the banks as well as the alternative sources – individuals do not over-stretch themselves and how do we close the regulatory loophole?

Mdm Speaker, I thank Ms Foo for those useful questions. They, in fact, come from two different directions, or they reflect quite different concerns. First, what happens between now and June 2015? Ms Foo is concerned that borrowers can still extend themselves even further in the meantime. What we have done is that we are starting off with some softer rules and, eventually, it becomes quite a hard rule in June 2015. Immediately, from December this year, banks will already be required to do a check with the Credit Bureau, as well as income checks on the borrowers, before increasing the credit limit. For those who already are over-extended, we are giving them time to bring down their debts and the financial institutions have to work with them to try to make this possible. But when it comes to increasing the amount of debt that they have, the rules in effect kick in quite early. We are not specifying that the 12-month limit is a hard limit now, the banks do have to make checks with the Credit Bureau to find out that total debt with all the financial institutions, and they have to also do a check on their income status.

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It has to be updated as well. That, I think, will have the right effect. Banks can make their own judgement and they do not want to force people into the unregulated market. The banks are able to make a good judgement on that between now and 2015.

The Member's second and third questions, I think, are essentially similar. We have to calibrate these rules such that we do not drive people into the unregulated, let alone, illegal markets. That is an important balance that we have to find, especially for those who already have significant debts. That is why we are giving them time to work their debts down. Through Credit Counselling Singapore and the banks' own efforts, some efforts can be made, case by case, to try and restructure their debts. But it is important for them not to extend themselves even further.

The easiest way to extend yourself even further is to go to the moneylenders or the illegal moneylenders. There, the interest compounds at a rate where you are almost guaranteed to have to increase your indebtedness.