Ridiculous to allow more unsecured personal loans when credit card debts and delinquencies are ballooning

Written by Ng E-Jay
04 March 2009

In this harsh economic environment where jobs losses are mounting by the day, it is no surprise that unsecured liabilities such as credit card debt is ballooning and defaults are on the rise. Yet, the Monetary Authority of Singapore (MAS) and Ministry of Law have seen it fit to allow more people access to unsecured credit facilities.

In a joint press release last Wednesday, MAS and the Law Ministry announced that from March 1, the minimum annual income requirement for unsecured bank credit facilities will be $20,000, down from $30,000. Individuals will be able to borrow up to twice their monthly income.

The minimum annual income requirement for credit cards remains unchanged at $30,000 for individuals aged 55 or younger and $15,000 for those over 55.

Until now, individuals earning below $30,000 per year have been able to seek unsecured loans only from non-bank lenders such as GE Money and SingPost or other licensed moneylenders.

The purported reason given by MAS for such a move was to “allow access to unsecured credit to more individuals who may have occasional genuine borrowing needs” and to ensure “a more consistent regime” between banks and other licensed moneylenders.

In reality however, neither banks nor other lenders care whether the borrowing needs of consumers are “genuine”, using MAS’ disingenuous choice of vocabulary. Their only concern is whether the consumer is likely to default or be late in payments.

The part about ensuring “a more consistent regime” between banks and other moneylenders is also nothing more than making sure that banks have a greater share in this lucrative business, and are not left behind while others enjoy the Government-sponsored privilege of charging consumers exorbitant interest rates.

Currently, banks charge an interest rate of 16 to 18 percent per annum for unsecured credit line facilities, and anywhere from 18 to 24 percent per annum for credit card debt. This is more or less in line with what non-bank lenders charge for their unsecured credit facilities.

The latest move by MAS and the Law Ministry therefore does not give consumers more advantageous options, but merely more chances to borrow even more money at the same high interest rates as before.

Is this a wise thing to do in such a treacherous economic climate?

On the very next day after MAS and the Law Ministry gave their press release on this topic, the Straits Times carried two articles, entitled “Credit card debts ballooning” and “More missing credit card, personal loan payments”.

Evidently, the economic crisis has taken its toll on consumers. It was reported that credit card debt hit an estimated $3.4 billion last December, the highest for that month in 20 years. Rollover balances jumped more than 13 per cent last year, and have been climbing steadily since 2006.

Also, more consumers are missing their credit card and personal loan payments. According to the latest figures from Credit Bureau Singapore (CBS), the percentage of consumers who missed at least one credit card payment rose slightly from 1.48 per cent in December 2007 to 1.67 per cent last December. Similarly, the percentage of delinquent personal loans that were 30 or more days past due increased from 3.73 per cent in December 2007 to 5.34 per cent in December last year.

Given this alarming rise in indebtedness and delinquency, I seriously question the wisdom of MAS and the Law Ministry in allowing banks to offer more unsecured credit facilities to all and sundry in such uncertain times.

Such a move only benefits the banks’ bottom line and profit margin, but does little to offer consumers a lasting and sustainable solution to their cashflow needs.

Rather than merely increasing the availability of unsecured credit facilities without caring how the money will be used by consumers, the Government should instead enact measures that help consumers save costs such as reducing the GST for essential products and services, and help citizens obtain jobs and earn more by instituting a “Singaporeans first” policy.

Such concrete measures would be of far greater benefit to Singaporeans and would provide a better and more sustainable solution to helping people tide over the global economic armageddon.