The government has accepted new proposals on licensed moneylending, together with one of the biggest change amid protests which is the 4% interest rate cap per month.
The Government has accepted most of the recommendations put forth by an advisory committee and these changes will be implemented progressively starting from July this year (2015). And yes this news has caused quite a stir in the moneylending industry but we at Empire Global are well prepared for these changes.
With twelve of the 15 recommendations from the committee being accepted, the new changes has created some news amongst moneylenders. Two of the recommendations – to lift to lift the moratorium on the granting of new licenses and to regulate debt collection behaviour will be reviewed in time as the moneylending industry adapts to the new regulatory changes.
4 Per Cent Interest Rate Cap: How does it affect everyone?
In order to protect borrowers, the new ruling will place caps on interest rates. As of current rules, there is no cap on interest or late interest rates for borrowers earning more than S$30,000 annually. Some licensed moneylenders charge additional fees (e.g when GIRO repayments fail or dishonoured cheques are issued).
There is currently no restrictions on the total borrowing costs for moneylending loans.
With the new measures kicking in, licensed moneylenders will be restricted to maximum rates. This include the new ruling that they cannot charge interest of more than 4 per cent per month plus this has to be on a reducing balance basis. Should a borrower be late in his repayments, licensed moneylenders can then charge a late interest, however this interest must not exceed more than 4 per cent.
The limit extends to charges on late payments: A similar maximum interest rate of 4 per cent a month, while late fees will not exceed S$60 a month.
Going forward, the total borrowing cost will be capped at 100 per cent of the original loan to keep debts from spiralling. Additional fees for, say, early loan redemption or unsuccessful GIRO deductions will not be allowed.
Furthermore, the total borrowing costs will not exceed 100 per cent of the principal loan sum which will prevent debts from getting out of control.
New Moneylending Regulations affecting Moneylenders?
Chairman of the Advisory Committee Manu Bhaskaran said data has been carefully studied to ensure that the industry remains commercially viable, even with the new caps.
“We completely accept that there will always be a class of distressed borrowers who will not be able to secure loans that they need urgently, from banks and other financial institutions,” he said. “So there is a role for a moneylending industry. And once you accept that, you must accept that you should allow them to have a decent return, taking into account the risk that they face, which is much higher.”
Although with the 4 per cent ruling, moneylenders will be allowed to charge an administrative fee up front, capped at 10 per cent of the original loan amount, for legitimate costs such as securing credit reports.
With regard to borrowers earning more than S$20,000 annually, the new rules will cap their loans at six times their salary from all licensed moneylenders. Such borrowers can currently take a loan of up to four times their monthly salary from each moneylender.
What’s Not Including in the Recommendations?
The government did not accept a recommendation that moneylenders be allowed to advertise in newspapers using strict templates, taking the view that advertising could lead to increased borrowing.
A new Moneylenders Credit Bureau will also provide a centralised, comprehensive database of borrowers who use licensed moneylending services.
“We set up this committee to come up with recommendations that would help protect the consumer, the borrower. But at the same time, if you kill off the moneylending industry, then the people who need to borrow won’t get access,” Mr K Shanmugan, Minister for Law and Foreign Affairs said. He further mentioned that the new recommendations are centred on how best to balance both.
The 4% interest rate caps would be the first of a list of proposals recommended by the committee to be rolled out within a month by the Law Ministry.
Mr Manu Bhaskaran, director of Centennial Group International and chairman of the committee said, that the committee has decided to accept the moneylenders’ recommendations to help them cover their administration costs incurred in giving out the loans and late payments from borrowers.