Published Date: 22 November 2002

Opening Address by Mr Tharman Shanmugaratnam, Senior Minister of State for Trade & Industry and Education at Suntec Singapore International Consumer Credit Counselling Conference, 21 November 2001 at 9am

Mayor Yu-Foo Yee Shoon & Parliamentary Colleagues
Distinguished guests and
Ladies and Gentlemen

Avoiding Excessive Consumer Debt


1   It is a pleasure for me to address you at this conference.  The subject of consumer credit counselling is appropriate and timely.

2   Household debt  has been growing rapidly in Singapore.  According to latest estimates by the Department of Statistics, total household liabilities, in the form of mortgages and personal loans, grew from 118% of annual personal disposable income in 1995 to 174% of personal disposable income in 2001, which was unchanged from 2000.

3   Our  ratio of household debt is higher than in the OECD economies, such as  the US, UK and Japan.  This is not unexpected, however.  Singapore's high level of household liabilities is matched by a high level of household assets. Years of rapid growth, high savings rates and  high home ownership have led to higher wealth accumulation by the household sector than in most other countries. The net wealth (assets minus liabilities) owned by the household sector in total amounted to 670% of personal disposable income in 2001 (or 368% of GDP). This is above the wealth ratios for most OECD countries.

Encouraging Prudence in Borrowing & Lending

4   We should however avoid a sharp build-up in consumer debt. The experience of many other countries has been that a rapid increase in consumer credit can lead to problems.  In Hong Kong, the increase in credit card debt  in the last few years has led to sharp increase in debts that have had to be written off  - from 4% of receivables in 2000 to over 13% this year.  The number of bankruptcy orders in Hong Kong shot up from 893 in 1998 to 9,151 in 2001.  On average, each bankrupt individual in Hong Kong was found to have borrowed from 12 financial institutions and incurred a level of  indebtedness amounting to 55 times monthly income1.

5   The expansion of consumer credit has therefore prompted some countries to tighten their lending rules. In South Korea the Financial Supervisory Commission has tightened the provisioning requirements for household loans, and will be looking into whether  banks have been too lax in extending such loans. In Hong Kong, the HKMA has advised banks to re-assess the effectiveness of their credit scoring models and other forms of credit analysis aimed at predicting bankruptcies.

6   In Singapore, the high level of household debt  has not led to major problems to date as it has been comprised mainly of mortgage loans, which have traditionally experienced  low rates of default2.  There are several reasons why this has been so. First, home purchases are a substantial investment and a long-term financial commitment.  Borrowers and lenders are thus less unlikely to make impulsive purchases or reckless credit decisions. This is particularly the case for owner-occupied homes. Second, our high savings rates and the use of CPF savings to service mortgage payments strengthens Singaporeans' means to service their debt and lowers the risk of default.  However, an over-concentration of CPF savings in housing assets will erode retirement savings and is unwise, which is why the Government has sought to  gradually tighten the limits on CPF used for housing.

7   A third reason why we have not run into major problems is that we have limited the amount of mortgage financing to 80% of the value of a property.  The 20% that the buyer has to put down results in substantial, upfront equity invested in the property, and lowers the likelihood of default. This policy is fundamental to encouraging prudence in borrowing and lending.

8   Personal loans and credit card advances are nevertheless a  potential concern, and we have to keep a watch on this.  Such loans  are typically unsecured, aimed at financing consumption, and attract  high interest rates.  Overleveraged individuals will find their debts compounding quickly. Personal loans are growing faster than personal disposable income, although they are  still a small component of total household liabilities.

9   We have not seen the explosive growth that has taken place in Hong Kong and Korea in personal loans and  credit card advances.  It is as well that we  acted early, in the mid-90s, to curb excessive spending on consumer credit.  MAS imposed rules that required that credit cards are only issued to individuals with incomes above $30,000 and with a maximum quantum of credit of 2 months income.  Similar rules were imposed on unsecured personal loans.  Consequently, credit card debt has, in total, been relatively low.  (The rollover rate3  on credit cards in Singapore is 30%, compared with 60% in Hong Kong.) However, charge-off rates4  in Singapore have  risen sharply in the last year, to  5.2%, although they remain lower than in Hong Kong where it is over 13%.

10   Whilst consumer credit is not yet a major problem therefore, its rapid growth calls for effective measures to prevent future hardship. However, government intervention alone cannot fully address the issue. An enterprising borrower will find ways to get around our regulations if he wants to.  For example, there are no doubt credit card borrowers who have been overcoming the 2-month borrowing limit by having multiple credit cards.

11   Our objective is to ensure that consumers are able to service their debts comfortably on their incomes, and not bring themselves and their families into distress.   This is ultimately possible only if lenders and borrowers themselves make financially responsible decisions. Prudent lending practices, and well-informed borrowers in control of their finances, are necessary ingredients for healthy and sustainable growth in credit usage. They help us avoid a boom-bust cycle of credit. 

12   Lenders must uphold prudent credit standards and ensure that the borrower is not over-leveraged, in other words that he is  likely to be able to service his financial commitments out of future income. The Consumer Credit Bureau, launched recently, will allow banks to better evaluate the risk profile, credit history and debt servicing ability of a borrower. It essentially enables banks  to undertake more accurate credit evaluations. Most of the advanced economies have consumer credit bureaus in place, including the US, Australia and New Zealand. In Asia, Korea and Taiwan have established credit bureaus, and Hong Kong is also establishing one. In many of these countries, consumers have benefited from competitive pricing of credit as a result of lenders being able to differentiate better borrowers from more risky ones. Banks in Singapore should consider how they can make  good use of the credit bureau, not just to reject credit to over-leveraged customers, but also to reward good credit applicants with lower rates.

13   Borrowers themselves have to make sound decisions on their financial commitments, in their own interest. There are a number of ways they can be helped to do so, through pre-emptive education and early access to  advice on  debts already incurred.  

Pre-emptive education

14   Pre-emptive education provides consumers with the skills and knowledge to make better and more responsible decisions on borrowing, and how to use their borrowings. The UK provides an interesting example.  In the UK, the Money Management Council operates weekly Money Clinics, as well as discussion meetings and workshops for different target groups -  from the young, to small business practitioners and retirees. These sessions are aimed at helping individuals to take control of their spending habits and credit usage, to prevent credit from turning into stubborn and unsustainable debt.

Advice on Debt Problems

15   The second facet to encouraging financial responsibility is having early access to advice and counselling when faced with financial difficulties.  Even with responsible lending and borrowing practices, it will  not be possible to avoid situations where borrowers run into financial difficulties. MPs meet such cases at our meet-the-people sessions and elsewhere in our communities. Often, however, people come to us too late, when legal actions against them are already well in train. It is important to ensure that problems do not spiral because individuals are not aware, early on, of the legal and financial implications of their debt burdens.

16   Consumer credit counselling is well established in countries like Australia, Canada and the UK, where such schemes have been in existence since the 1970s. In Canada, debt counselling is a mandatory requirement prior to an unconditional discharge from bankruptcy. Mr Malcolm Hurlston, one of our guest speakers at this Conference, is founder and chairman of the leading debt charity in the UK - the Consumer Credit Counselling Service- which I am told has helped tens of thousands of people in the UK.

Organising Credit Counselling for Residents

17   I encourage our bankers and the community leaders present today to consider how consumer credit counselling can be implemented in Singapore.  The Association of Banks in Singapore, CDCs and the Subordinate Courts, who have taken the initiative to jointly organise this conference, could extend this collaboration to organise programmes to educate consumers on the responsible use of credit.  These programmes will be most effectively conducted at the local or regional level, where residents are more likely to come forward.

18   I hope that today's conference will result in plans and action to implement credit counselling schemes in Singapore. I wish you a productive two days.

1Source: LegCo Panel on Financial Affairs: Proposal on Sharing of Positive Consumer Credit Data

2 2.3% NPL ratio as of June 2002, compared with an overall NPL ratio of 8.5%.  Source: MAS

3 The rollover rate is defined as credit card receivables outstanding at previous statement date less payment made between then and current statement date, as a percentage of credit card receivables.

4 The charge-off ratio refers to the total amount of credit card receivables written off during a period as a percentage of the total credit card receivables at the end of that period.