Risky consumer loans to surge upon MAS’ delay of tighter consumer debt rule

Highly leveraged borrowers would increase earnings.

Singapore’s banks already have large consumer loan exposures, and the delay of the implementation of a tighter rule is credit negative for the banks’ unsecured consumer books.

Last Tuesday, the Monetary Authority of Singapore (MAS) said it was reviewing and might delay the scheduled 1 June 2015 rollout of tighter macro-prudential measures to limit consumer debt.

According to Moody’s, the rule would limit total unsecured consumer debt to no more than 12 months of income and require individuals to pay down any excess borrowing over a grace period. If the MAS were to delay the rollout of a tighter consumer debt rule, highly leveraged borrowers would be able to increase their borrowings and the growth of risky consumer loans would continue.

Moody’s says that the potential delay relates to MAS’ additional impact analysis on households. According to the MAS, 4%-5% of borrowers likely already have unsecured borrowings that exceed their annual income.

Here’s more from Moody’s:

OCBS and DBS since 2013 have increased their exposure to “professionals and individuals,” which includes unsecured lending, while UOB’s exposure was mostly flat. Considering the banks’ sizable exposure, further deterioration in the quality of this borrower segment would negatively affect their asset quality.

Introduction of the tighter consumer lending regulation in June would not lead to a spike in problem loans for the banks because borrowers that exceed the 12-month income limit would be granted grace periods to comply: two years if total debt is between 12 and 16 months of income, and four years if debt exceeds 16 months. These grace periods would only be granted if borrowers enter repayment plans with their lenders. In our opinion, given the generous grace periods for overstretched borrowers, the delay in the rollout – if any – will likely be short.