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19 July 2013

Debt ratio curbs for property loans: MAS replies

Source: Straits Times | Forum Letters 

MR TAN Teck Leng is correct to say that the Government is concerned about households "taking on a greater debt burden than they can afford" ("Debt ratio loophole?"; Wednesday).

To put the issue in context, housing loans make up more than 70 per cent of household debt. This is why the Monetary Authority of Singapore (MAS) decided to apply the total debt servicing ratio (TDSR) framework to the granting and refinancing of property-related loans for a start.

A large property-related loan can lead to serious over-borrowing, and applying the TDSR will mitigate that risk.

To ensure financial prudence for non-property related loans, the MAS has put other measures in place.

For example, we recently introduced financing restrictions on loans for the purchase of motor vehicles.

We have longstanding rules that cap credit card and other unsecured credit facilities taken up by an individual with a financial institution, at four times the individual's monthly income.

The MAS has also consulted the public on additional rules to promote the responsible use of credit cards and unsecured credit.

As other personal loans are granted frequently but do not form a large share of banks' loan books by value, applying the TDSR framework each time any of these other loans is given could impose a disproportionate resource burden on financial institutions. It may also have the unintended effect of driving borrowing out of the banking system.

The MAS, however, expects financial institutions to take a holistic and prudent approach in their credit assessment of borrowers when granting both property and non-property-related loans.

As Deputy Prime Minister Tharman Shanmugaratnam said recently, while we do not intend to extend the TDSR to other types of loans any time soon, the banks should apply the principle of holistic assessment of the borrower for all loans.

The MAS' current approach will therefore rest on supervision rather than on further extension of the TDSR rule to non-property loans.

The MAS will continue to monitor the lending practices of financial institutions to ensure they maintain prudent practices, and reserves the option of applying the TDSR framework more broadly if the need arises in future.

Angelina Fernandez (Ms)

Director (Communications)

Monetary Authority of Singapore