The Monetary Authority of Singapore (MAS) has introduced new measures aimed at limiting household debt and improving lending practices.
The new rule will see an individual’s loanable amount through credit cards and unsecured credit lines capped at 12 times that person’s monthly income.
Borrowers have been given a transition period of 18 months to lower their current loans to within the prescribed limits. But borrowers can exceed it for a period of 89 days, after which they will be cut off from any credit facilities.
To avoid high interest costs normally associated with large loans, MAS has urged individuals to keep their borrowing “well within” the limit. It highlighted that “even a few months' income” of unsecured debt could lead to a “big financial strain” on borrowers. The central bank could further reduce the limit, depending on the results of these initial curbs.
MAS also unveiled a range of detailed measures that will complement the borrowing limit as well as prevent borrowers from accumulating large debts.
Financial institutions will need to review a borrower’s credit limits and total debt prior to granting a new credit card or unsecured credit facility. This will provide a “more realistic” assessment of a borrower’s ability to repay a certain amount, MAS noted.
To stop those borrowers’ struggling to repay their current debt from getting into “further debt problems”, MAS has prohibited institutions from granting unsecured credit to borrowers who are overdue by 60 days or more on their current unsecured debt.
There is also a requirement for financial institutions to seek the approval of a borrower every time they raise credit limits. The potential cost of rolling over credit cards and credit facilities should also be disclosed to borrowers every time this is done.
The new rules will be implemented in stages between December 2013 and June 2015 to enable borrowers and financial institutions to adjust.
Romesh Navaratnarajah, Senior Editor at PropertyGuru, edited this story. To contact him about this or other stories email email@example.com