Daniel Yap works in the media industry and enjoys blogging on social and political issues. He is married with four children. He blogs also at: http://doulosyap.wordpress.com
Labour MP Zainal Sapari’s speech at the Committee of Supply debate about plans to further regulate licensed moneylenders threw up some shocking revelations about the business – effective interest rates of 43000% and 159,000% (no typos there), fee charges that were larger than the loan principal, and other practices which he called “absurd”. Mr Lim Biow Chuan also added his voice to the call for better regulation for licensed moneylenders.
All this sounds too crazy to be true, so I decided to dip my toes (just barely) into the licensed moneylending scene by visiting one of them posing as someone interested in a loan.
I dropped in on a licensed moneylender in the city with a clean, but very private shopfront and big LED signs outside promoting their loans. Inside, a streetwise-looking fellow in his 30s sat behind a desk piled high with paperwork.
I asked about a loan, and gave him the details he wanted – a principal of $2,000; my monthly income at $3,000; first time at a moneylender, just comparing it to banks. He told me that the interest rate was high. The $2,000 would have to be paid back in five weekly installments of $560 a week – $2,800 in total.
I asked if I could se a list of products or terms, but he claimed that they weren’t allowed to print information on brochures or anything like that. All I had was his word that there would be a contract with “all the details” for me to sign if I was sure I wanted to borrow. If I decided not to sign the contract, he would “tear it up”. No obligations. No way to compare. No details to take home and ponder over.
I asked about the fees and penalties and what would happen. His response: “Don’t be late, then there will be no problems.” There was nothing else he would tell me unless I wanted to dive into the paperwork, and he needed my IC for that.
I nodded and got out of there as calmly and as quickly as I could – I can only imagine how things would have been different if I really had been desperate for cash.
Mr Lim’s statement that interest “could be up to 20 per cent if the borrower’s annual income is below S$30,000” may be grossly understated. My $2,000 loan inquiry turned up an effective annual interest rate of 2,900 per cent per annum, and that’s assuming the moneylender doesn’t charge me any late fees, additional late interest rates, fees for sending his debt collectors to chase me, or any other off-the-chart fee (but of course he will).
Illegal loan shark incidents seem to be on the wane, fortunately, and this is good in the sense that the debt problems of one individual no longer spill over into the neighbourhood, but consumer debt itself is still a major concern in Singapore. Mr Sapari called it “legalised sanctioned harassment” but didn’t give any details. It seems clear that some reform in the moneylending business is needed.
Mr Sapari had asked for several measures, including 1) overall caps on interest and charges payable within a credit year, 2) definitions and stipulations on the types of charges moneylenders can impose, 3) limits to the total amount payable in a credit year after which the loan is considered fully discharged.
Law Minister K Shanmugam was reluctant to give assurances on a timeline for a rollout of these changes, nor which would be implemented, citing concerns about the industry “going underground”.
One of the measures Mr Sapari mooted was a centralised loan database to prevent desperate borrowers from going from one moneylender to another to rollover loans or grab more cash (and get in more trouble). I assume the function of this is very much similar to the Total Debt Servicing Ratio (TDSR) framework that is already in place for property loans. It should not be difficult to extend this to loans from licensed moneylenders.
Overall, reducing the need for such “emergency” lending would also be critical. More affordable healthcare, better financial education, better wages for low income earners and a robust community help system (many of Mr Sapari’s case studies were brought to light at meet-the-people sessions) will put a dent in runaway debt.
Turning to licensed moneylenders is still the recourse of the desperate and the foolish. Legal doesn’t mean safe or good, and the system needs to be improved.