September 11, 2013 / 9:59 AM / 4 years ago

Singapore announces lending curbs amid Asian household debt concerns

High rise residential buildings are pictured in Singapore August 9, 2009.Tim Chong

SINGAPORE (Reuters) - Singapore announced new rules on Wednesday to cap credit card and other forms of unsecured lending by banks, amid growing concerns about rising household debt in Asia by consumers once known for their thrift.

Asia has seen consumer debt levels rise sharply in recent years due to low interest rates and aggressive lending by banks.

For Singapore, the ratio of household debt to gross domestic product now stands at around 75 percent, up from 55 percent in 2010 and 45 percent in 2005, according to data compiled by Standard Chartered.

"The rise in household debt is a fairly generic trend across Asia," said Selena Ling, head of treasury research at Oversea-Chinese Banking Corp.

"From a macro-prudential point of view, you'd want to mitigate the increase in household debt, particularly with respect to unsecured loans."

In Asia, household debt levels are highest in South Korea and Malaysia, followed by Thailand, while Singapore is somewhere in the middle of the pack, she added.

Bank of America Merrill Lynch estimated in a recent report that household debt in South Korea stood at around 88 percent of GDP at the end of March this year. The ratio for Malaysia was 80.5 percent, while Thailand's is 77.5 percent.

Singapore has already taken steps to cap borrowings for property purchases, while Thailand's central bank has warned about rising household debt and a possible credit bubble, although it backtracked slightly on Aug 21 by saying it was less concerned about the high level of borrowings by households.

Credit Suisse said in a recent report the household debt situation in Malaysia, Korea and Thailand are more worrying than in Singapore and Hong Kong, where the level of financial wealth is also high.

"For these two countries, the ratio of household debt to financial assets is 13 percent on average, compared to an average of 48 percent for Korea, Malaysia and Thailand," the Swiss bank said in its recent report.

In Singapore, the changes to the rules on unsecured lending will to be implemented in stages from Dec 1, and they include limiting the total amount of unsecured loans an individual can take to 12 times that person's monthly income.

The changes are "aimed at improving lending practices by financial institutions and enabling individuals to make better borrowing decisions", the Monetary Authority of Singapore (MAS)said in a statement.

Singapore, which has a population of 5.3 million, had 9.3 million credit cards in circulation at the end of 2012, up from 8.3 million at the end of the previous year. Banks wrote off S$226.6 million in bad debt last year, an increase of 21 percent from S$186.7 million at end-2011.

But people in Singapore, which has more millionaires per capita than any other country, also own lots of assets, so the debt-to-asset ratio in the city-state is low relative to other Asian countries.

Currently, it is relatively easy for banks to issue credit cards in Singapore, with lenders such as Citibank advertising that they are able to do so within 24 hours of receiving an application.

But with the new rules, banks will be required to review a borrower's total debt and credit limits before granting a new credit card or unsecured credit facility. Banks must also carry out such reviews before increasing the credit limit on such facilities, the central bank said.

"Most borrowers of unsecured credit should aim to stay well within the 12-month limit, as such borrowings typically attract high interest costs," MAS said, adding that it is monitoring the situation and will lower the limit if necessary.

Editing by Kim Coghill

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