More people having trouble paying off unsecured debt

Singapore

MORE people are having trouble paying their unsecured debt on time. Even amid a tight labour market and rising wages, the number of people with spiralling debt has jumped 10 per cent from last year to 85,352 and the numbers are up 32 per cent from 2011.

The worry is that the debt situation will worsen given the weakening economy.

The unemployment rate remained "low and stable" amid the tight labour market, said the Ministry of Manpower last month. The seasonally-adjusted citizen unemployment rate was 2.9 per cent in June 2015, the same as a year ago. Singaporeans are earning more due to the tight labour market. Real median gross monthly income for full-time employed Singaporeans grew last year by 1.4 per cent, though this was lower than the 4.7 per cent growth in 2013.

Consumers' outstanding unsecured debt continued to rise in H12015, said the Credit Bureau Singapore (CBS) on Monday.

In June 2015, the number of consumers who missed two or more months of their unsecured debt payments rose 10 per cent to 85,352 compared to the year-ago period, it said.

"This also represents a 32 per cent jump from the corresponding number of debtors in 2011," said CBS.

These debtors, who hold unsecured debt either in the form of a credit card, overdraft facility or personal loan, represent 5 per cent of the total population of unsecured credit customers.

In tandem, their overdue balances rose to S$288,445,498, a 7 per cent rise from the year-ago period and a 74 per cent jump from 2011.

Delving into the details of outstanding unsecured debt show some type of loans may be stabilising.

Over the last four years, unsecured debt exposure has also increased, with average balance per consumer for unsecured credit cards and overdrafts rising 16 per cent to S$7,971 from 2011 to 2015.

However, CBS said debt exposure appears to be stabilising in June 2015, where average balance per consumer for unsecured credit cards and overdrafts fell slightly to S$7,971 from 2014's S$8,018.

Still, the average principal sum for unsecured personal loans rose 5 per cent to S$13,584. CBS said unsecured personal loans which include study loans and renovation loans account for 4 per cent of the unsecured credit portfolio while credit card and overdrafts make up the rest.

It could be that while consumers are enjoying income growth, they may be borrowing more and can't handle the payments.

"We understand that some customers.... may need to obtain unsecured financing for many different reasons, such as unexpected medical bills, travelling on vacations, emergency home repairs or just extra cash to pay their bills," said a banker.

"Our unsecured customers have remained prudent in their borrowings and the majority of our customers pay off their balances in full each month," said Anthony Seow, DBS Bank Singapore head of cards & unsecured loans.

Economists say it's worrying that more people are having trouble settling their debt given the weakening economy. Singapore's economy may slip into a technical recession in the third quarter after contracting in the second quarter of 2015.

"The rise in unsecured debt and numbers who are missing their payments is rather worrying," said Chua Hak Bin, head of Asean Economics, Bank of America Merrill Lynch .

"Rising interest rates, a weaker job market and an economy on the edge of recession may be leading to more financial distress and defaults," he said.

"The sluggish economic cycle probably makes this deterioration trend somewhat inevitable," said Selena Ling, OCBC Bank economist.

However, given the tightening rules on unsecured debt, I'm a little surprised at the pace of the deterioration, she said.

Debt may have been compounded over time, said Leong Wai Ho, Barclays economist.

"For instance, it may also be due to the sharp increase of unsecured credit loan schemes that were marketed by banks in recent years, making it easier for indebted individuals to roll over their debt with another facility," said Mr Leong.

Tighter rules on unsecured credit may have led to the spike in outstanding unsecured debt as borrowers could no longer refinance their debt by transferring to another bank.

One of the most lucrative unsecured credit products is "balance transfers" - where a borrower can transfer to another bank his unpaid debt just before it became overdue, with the new bank offering a lower interest rate though only for a short promotional period.

In June 2015, new rules for unsecured credit kicked in to stop individuals who have already accumulated high levels of debt avoid piling on further debt.