Financing of Certificate of Entitlement (COE) Premiums

Mr Gan Thiam Poh asked the Prime Minister whether the Monetary Authority of Singapore (MAS) would consider disallowing banks to finance either the full or partial Certificate of Entitlement (COE) premiums as part of the measures to moderate the rise in COE premiums.

The Deputy Prime Minister and Minister for Finance (Mr Tharman Shanmugaratnam) (for the Prime Minister): Mr Speaker, Sir, Mr Gan Thiam Poh's question has to do with whether the MAS should disallow banks from financing, either fully or partially, Certificate of Entitlement (COE) premiums as part of the measures to moderate the rise in COE premiums. We did, in fact, have financing limits on car loans by banks from 1995 to sometime in 2003. They were, however, not very effective in influencing COE prices one direction or another and in particular in stemming an increase in COE prices.

One reason is that banks are not the only financing source. In fact, their share of car loans today is somewhat lower than it was10 years ago. Individuals can borrow from other entities such as car dealers and non-bank credit or leasing companies to get around the rules that are in place for banks. They can also draw on their own savings to pay COE premiums.

The more fundamental factors which impact on COE premiums include the economic outlook which shapes demand, the supply of COEs which is determined by the allowable vehicle growth and by car owners' decisions on their own part on whether they decide to de-register their cars at the preceding period. That determines the supply of COEs.

In addition, I should say from the perspective of financial stability which is the MAS' primary concern, car loans granted by financial institutions do not pose threats to financial stability. These loans form a very small proportion of total loans in the financial system, or even of total consumer loans and the proportion of car loans that are non-performing loans is low – extremely low. Disallowing banks from financing COEs fully or partially would therefore not be an effective or appropriate tool for addressing pricing COE premiums. I can assure Mr Gan Thiam Poh, however, that MAS expects financial institutions to exercise prudence when extending loans for the purchase of cars, taking into account the credit worthiness of the borrower, his debt servicing ability, and the value of collateral.

Mr Gan Thiam Poh: I thank the Deputy Prime Minister for the comprehensive reply. What I am concerned about is that the rising COE premiums will have an impact on the cost of living in Singapore. That would translate into higher transport costs such as taxi fare, bus fare, etc. My point is that there could be different ways to moderate the rise in COE premiums in addition to alternate sources of financing for consumers or users. It could also be fiscal measures, such as cooling measures, to moderate the rise in COE premiums. Will MAS consider all those measures?

Mr Tharman Shanmugaratnam: I think part of Mr Gan's question is a broader question about price inflation and part of it really is the issue for LTA and MOT to address. The COE system, if I could just say very briefly on behalf of MOT or LTA, is not one that is designed to stabilise COE prices as such. It is a system which allows an available supply of COEs as determined by the allowable vehicle growth rate to be rationed. And depending on demand, which is itself shaped by the economic climate, we then have the COE price being determined through open bidding. The policy is not to stabilise COE prices as such.

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However, Mr Gan does have a valid concern as we all do about the overall cost of living and the COE premiums can, if they spike up very suddenly and substantially, influence the cost of living, indirectly through business costs as well as directly for those who are purchasing their cars. This is something that has to be addressed more broadly and MAS does play a role in addressing inflationary pressures. It is something which we keep a very close watch on. I would add, however, that the impact of the COE premiums on the CPI index can sometimes be a little exaggerated because not many people buy COEs in any particular year, but the impact of that price spike can be quite significant on the measured CPI index.

It is a valid concern but not one that I think should be addressed by re-imposing rules on bank loans because we have found from the past – and, in fact, I had a look at the data because of Mr Gan's question – it is quite clear from the data on COE prices and the restrictions we placed on bank loans that the measures on bank loans had virtually no impact.