Credit card curbs rein in borrowing binge

Singapore

THE proportion of leveraged borrowers has fallen following the latest rules to rein in credit card debt, the latest Financial Stability Review report released on Thursday showed.

But the Monetary Authority of Singapore (MAS) said it is watching the impact of fintech on the rise of unsecured borrowing by consumers.

In the report, it cited data from the Credit Bureau Singapore showing that the growth in outstanding credit card balances extended by banks has fallen. This is down from the peak of 14 per cent year-on-year in growth in the second quarter of 2012, to an average of a 2.6 per cent year-on-year increase in the first nine months of this year.

As at August 2017, there were 27,000 borrowers with outstanding unsecured debt exceeding 18 times their monthly income, representing less than 2 per cent of all unsecured credit borrowers. The figure in February 2015 was 51,000 - which works out to a decrease of 47 per cent.

The significant fall in the number of over-leveraged borrowers comes after the MAS introduced a borrowing limit. Under this rule, financial institutions would not be allowed to extend further unsecured credit to borrowers whose unsecured debts exceed the limit for three straight months.

The limit is being progressively tightened to allow some breathing room for borrowers. Between June 2015 and May 2017, the limit stood at 24 times a borrower's monthly income. The borrowing threshold was tightened to 18 times in June 2017; from June 2019, that limit will be brought down to 12 times.

To be sure, MAS has cautioned that there are new borrowers with debts above 12 times their monthly income, and it has urged such borrowers and those from "highly leveraged households" to pare their debt through various debt restructuring options.

MAS is also monitoring how consumer credit services offered by fintech companies could lead to higher unsecured credit by reducing loan administration costs.

"Risks arising from such lending should be balanced with the potential financial inclusion benefits that such lending can bring about," said the regulator in one of its several studies on issues relating to financial stability.

"For example, the use of technology and data analytics to assess creditworthiness has helped to increase the reach of micro-lending, especially to customers often overlooked by banks. However, lower-income borrowers typically have lower financial buffers and may be more vulnerable to interest rates and income shocks."

In its separate study on the impact of fintech on financial stability, the MAS noted that Singapore banks that do not fend against fintech disruption could stand to lose more than 5 per cent of their operating income.

MAS said most of the potential reduction in operating income would come from disintermediation in the payments space. Banks in Singapore, Hong Kong and South Korea are more reliant on fee income from payment services than their Asian peers.

MAS said: "The estimated potential reduction in operating income is based on an unmitigated scenario in which banks do not take actions to address the fintech competition.

"In reality, banks can also harness technology - those that adopt a digital model successfully could perform better than those that do not."

MAS also cited numbers suggesting that cost savings from leveraging fintech - such as in automating banking functions or the use of artificial intelligence - could yield a 30 per cent reduction in costs. That, in itself, represents 10 to 20 per cent of Asian banks' operating income.

MAS said more work is ahead in assessing the financial stability implications of fintech on banks.

"Just as fintech companies work to resolve pain points for consumers of financial services, it is equally important for policymakers and the industry to work together to identify potential systemic pain points that may inadvertently arise from fintech adoption.

"Only then can fintech serve as a sustainable driver of improvements to the financial services industry."

READ MORE: Another warning on property market puts developers on the defensive