On 30 September 2016, the Monetary Authority of Singapore ("MAS") issued a consultation paper inviting comments on a proposed change to the industry –wide borrowing limit for unsecured credit. This note provides a brief summary of the proposed legislative amendments.
Limiting additional unsecured credit facilities for individuals whose outstanding unsecured debt exceed 12 times their monthly income
At present, financial institutions ("FIs") are not allowed to grant further unsecured credit – whether by allowing the drawdown of existing credit limits, approving credit limit increases, or granting new unsecured credit facilities – to individuals whose outstanding unsecured debt exceed the industry-wide borrowing limit for three consecutive months (the "Balance-to-Income ratio", or "BTI ratio"). The term "outstanding unsecured debt" refers to balances on which interest is chargeable across unsecured credit cards, charge cards, and other unsecured credit facilities.
MAS intends for the borrowing limit to be reduced from a BTI ratio of 24 times as at present (and which has been the case since 1 June 2015), to a BTI ratio of 12 times from 1 June 2019. The existing borrowing limits are currently being phased-in to allow existing over-extended borrowers more time to pay down their debts. The phasing-in would be as follows:
- 24 times monthly income (present);
- 18 times monthly income (starting from 1 June 2017); and
- 12 times monthly income (starting from 1 June 2019).
MAS has however observed that some borrowers with BTI ratios above the eventual borrowing limit of 12 times their monthly income are still continuing to add on to their pre-existing high debt levels. Thus, in order to assist these borrowers in better managing their outstanding unsecured debts – in light of the eventual borrowing limit – MAS proposes to amend the unsecured credit legislation from 1 June 2017 to disallow FIs from granting new unsecured credit facilities and credit limit increases to borrowers with outstanding unsecured debt exceeding 12 times their monthly income at the point of application.
The current exclusions for need-based loans (for example, for medical and education reasons) will continue to apply, i.e. borrowers may still apply to FIs for such excluded loans.
MAS has proposed for these legislative amendments to be made to the Banking (Credit Card and Charge Card) Regulations 2013 as well as the relevant various MAS notices.
The consultation period ends on 31 October 2016.