Singapore's potential delay of tighter consumer debt rule is credit negative for banks: Moody's

Last Tuesday, the Monetary Authority of Singapore (MAS) said it was reviewing and might delay the scheduled 1 June 2015 rollout of tighter macro-prudential measures to limit consumer debt.

Postponing the implementation of this tighter rule is credit negative for the quality of Singapore banks' unsecured consumer books, and for DBS Bank Ltd, Oversea-Chinese Banking Corp Ltd and United Overseas Bank Limited (UOB), which already have large consumer loan exposures.

The rule would limit total unsecured consumer debt to no more than 12 months of income and require individuals to pay down any excess borrowing over a grace period.

If the MAS were to delay the rollout of a tighter consumer debt rule, highly leveraged borrowers would be able to increase their borrowings and the growth of risky consumer loans would continue. We understand that the potential delay relates to MAS' additional impact analysis on households. According to the MAS, 4-5 per cent of borrowers likely already have unsecured borrowings that exceed their annual income.

OCBS and DBS since 2013 have increased their exposure to "professionals and individuals," which includes unsecured lending, while UOB's exposure was mostly flat. Considering the banks' sizable exposure, further deterioration in the quality of this borrower segment would negatively affect their asset quality.

Against a backdrop of rising household leverage, the credit quality of unsecured consumer loans deteriorated across the Singapore banking system in the second half of 2014.

The charge-off rate on credit cards increased to a five-year high of 5.5 per cent in December 2014. Conscious of the growing risks and because of previous macro-prudential measures, such as the introduction of the 60 per cent maximum total debt service ratio in 2013, Singapore banks have slowed the growth in their consumer books.

Introduction of the tighter consumer lending regulation in June would not lead to a spike in problem loans for the banks because borrowers that exceed the 12-month income limit would be granted grace periods to comply: two years if total debt is between 12 and 16 months of income, and four years if debt exceeds 16 months.

These grace periods would only be granted if borrowers enter repayment plans with their lenders. In our opinion, given the generous grace periods for overstretched borrowers, the delay in the rollout - if any - will likely be short.

Eugene Tarzimanov, Vice President - Senior Credit Officer, Financial Institutions Group, Moody's Investors Service Singapore Pte. Ltd.

Simon Chen, Vice President - Senior Analyst, Financial Institutions Group, Moody's Investors Service Singapore Pte. Ltd.