Dec 25, 2012

Singapore - Singapore Looks to Tighten Consumer Credit

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Owning a car or a home can be relatively expensive in Singapore, but money is cheap and the central bank here aims to make sure consumers don’t get caught up in the temptations of easy cash.

Singaporeans aren’t known as profligate spenders, and their household debt-to-GDP ratio remains well below levels in developed nations. In 2010, that ratio was 0.7% in Singapore, compared with about 1% for the U.S. and U.K., according to Singapore’s Department of Statistics.

Nevertheless, consumer credit is on the rise, with new credit-card loans reaching 8.4 billion Singapore dollars (US$6.9 billion) in October, up from S$4.4 billion the same month in 2007. Part of what is fueling that rise is the near-zero interest rates that have prevailed since global central banks implemented loose monetary policy in the wake of the financial crisis.

Interest rates in Singapore are among the lowest in Asia. Its central bank uses the exchange rate to control monetary settings, rather than setting a benchmark interest rate. As a result, lending is more closely linked to the rates set by the U.S. Federal Reserve.

“The ultra-low interest rate environment has been a big driver of rising consumer credit,” said DBS economist Irvin Seah. “When real interest rates are already negative, there is every incentive to get yourself over-leveraged.”

Mr. Seah said at this point, mortgage loans pose a bigger danger in Singapore than credit cards because amounts are larger, and because of the potential for asset-price deflation. But the MAS is moving on both fronts to rein in what the central bank calls “over-borrowing.”

New rules, still in the proposal stage, would require banks before lending to more deeply scrutinize a would-be-borrower’s outstanding debts, across all financial institutions.

Consumers who are more than 60 days past due on debt to a certain bank won’t be able to charge more on credit cards issued by that bank, and those who carry for more than six months an outstanding balance greater than two months of their income will also be barred from running up more debt.

Martin Vaughan

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