MAS sets cap on those heavily in debt

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New move to help borrowers avoid getting overwhelmed by unsecured debt

More help is on the way for borrowers in danger of being overwhelmed by unsecured debt like credit card borrowing.

A new Credit Limit Management Measure coming into effect on Jan 1 will potentially affect people who have unsecured debts that are six times their monthly income.

Banks will not be allowed to grant any increase in credit limits or any new unsecured credit facilities to such a person if they cause his total credit limit to exceed 12 times his monthly income.

Ms Loo Siew Yee, assistant managing director (policy, risk and surveillance) at the Monetary Authority of Singapore, said yesterday that the measure aims to help borrowers avoid getting over their heads in debt.

In June 2015, an industrywide borrowing limit was introduced that capped unsecured loans to 24 times one's monthly income.

It was cut to 18 times in June this year, and will be lowered to 12 times from June 2019.

There are an estimated 60,000 borrowers with unsecured debts between six and 12 times their monthly income.

That is only about 4 per cent of the total 1.5 million unsecured credit users here.

These borrowers will be affected only if they apply for new credit facilities, or a credit limit increase, that push their total credit limit above 12 times their monthly income.

They can still draw on their existing unutilised unsecured credit facilities.

Financial associations and banks have given a thumbs up to new measures.

Mrs Ong-Ang Ai Boon, director of the Association of Banks in Singapore, said: "This new policy should help customers not to further ramp up their indebtedness."

Ms Jacquelyn Tan, United Overseas Bank's head of personal financial services Singapore, said it will encourage financial prudence and help consumers spend only within their means.

This is how it works.

Take a person who earns $4,000 a month with unsecured debt of $26,000, or 6½ times his monthly income.

Assume also that he already has an unutilised credit of $14,000 or 3½ times his monthly income, which adds up to a total credit limit of 10 times his monthly income.

That means he can apply only for additional unsecured credit up to two times his monthly income, or $8,000.

But consider a person earning $5,000 a month with debts of $40,000, or eight times the monthly income.

Assume he has an un-utilised credit of $25,000, or five times his monthly income.

That makes a total credit limit of 13 times the monthly income so he would be unable to get additional unsecured credit from a bank.

The credit limit does not apply to secured loans such as property and car loans, and unsecured loans for business, medical spending and education.