Tag Archives: Interest Rates

4% rate cap not feasible: moneylenders

While licensed moneylenders in Singapore admit there is a need to cap loan interest rates, they argue the four percent monthly rate put forward by an advisory committee is rather unreasonable, reported the media.

They insist they should be allowed to charge 15 to 20 percent per month in order for them to survive.

Notably, the committee announced on Monday five draft recommendations, which include the four percent monthly rate as well as limits on loan amounts.

Formed in June, the 15-member panel, initiated by the Law Ministry, was tasked to review the licensed moneylending industry in view of complaints relating to high interest rates and excessive borrowing.

Commenting on the four percent figure, Moneylender’s Association of Singapore’s Assistant Secretary Wayne Ng said the proposal shocked moneylenders.

Ng revealed he made a presentation to the committee two or three months ago in which he detailed the costs of operating a moneylending business.

“I don’t know how the panel came up with four percent even after we shared our operating costs. Four percent is totally not feasible.”

For example, Ng, who runs a moneylending company in the heartland, said he pays each of his three employees an average salary of $2,000 a month on top of the $7,000 monthly rent that he pays.

“Assuming I managed to loan $100,000 in one month and everyone pays me back in full within the month, at four percent interest I would make a gross profit of S$4,000. That’s not even enough to cover my rental,” he said.

Meanwhile, David Poh, the association’s president, said he will hold a meeting with all his members to consolidate data from them, which he will submit to the committee for review.

Poh, who is on the committee, noted moneylenders generally serve high-risk borrowers who are unable to secure loans from banks, with at least 20 percent of them defaulting on payments.

“It’s a high-risk business and moneylenders rely on short-term interest gained from the loans. Hence, they would need to charge a higher interest rate to sustain their businesses,” said Poh.

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Rates, not benchmarks, need a fix

The latest home loan innovation to hit Singapore is a benchmark based on fixed deposit rates plus a premium. All the better to vary your mortgage interest with, the salespeople say. But what consumers really need is not another twist to the floating-rate mortgage, but rather better fixed-coupon loans that are easy to account for in budgets and that protect against rising interest rates.

DBS Bank has been making the headlines with its introduction of the “fixed-deposit home rate“. The new benchmark is being marketed as an easy-to-understand alternative to the Singapore Interbank Offer Rates (Sibor). Whether that is actually the case is debatable.

The Sibor-setting process admittedly has serious flaws – banks around the world have been found to try to manipulate interbank rates, for example – but most of the time it serves its purpose adequately. Because the benchmark is so widely used, there is usually an incentive to be accurate – a rate that benefits one position could just as easily hurt another in the bank’s books.

For all of Sibor’s faults, though, it is not clear that basing loan rates on the bank’s fixed-deposit interest is necessarily better for consumers. If Sibor is hard to understand, the mechanism for setting fixed-deposit rates is even more opaque.

Consumers might be better served if the banks and regulators pour their resources into developing a greater variety of fixed-rate mortgages.

Banks have long complained that lack of demand is the real culprit behind the market’s lacklustre fixed-rate mortgage offerings. Demand is unlikely to be any better than it is now with prevailing interest rates near all-time lows. While rates are not expected to climb quickly over the next year, the outlook has nevertheless become brighter.

For a homebuyer, the higher risk is of rates and inflation rising faster than expected, making the stability of a fixed-rate loan more attractive at this time. Offering longer tenures could help improve take-up among borrowers. A quick check showed that the longest period for which a Singapore retail homebuyer can lock in a rate at the moment is five years. For serious buyers, who are in it for the long haul, five years does not offer much comfort. Friendlier early-payment terms would also help.

Regulators can also help by looking to develop mortgage securitisation that could allow banks to share or transfer some of their risks. Helping to develop the fixed-rate mortgage market makes sense from a risk perspective; defaults are less of a problem when borrowers can budget for interest payments well into the future. Fixed-rate mortgages do not always offer the best deal, but homebuyers should have more viable options if they choose to go down that path.