FINANCE COMPANIES (AMENDMENT) BILL

Order for Second Reading read. 3.25 pm

The First Deputy Prime Minister and Minister of Education (Dr Goh Keng Swee): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time".

Finance companies operate much along the same lines as commercial banks. They, too, take deposits from and lend money to the public, though finance companies cannot offer current account facilities to cus- tomers. However, unlike commercial banks, their operations are basically confined to the domestic market; they do not open branches overseas nor can they deal in foreign exchange and gold. There are currently 34 finance companies operating in Singapore. Out of these, 11 are owned by local banks, five are owned by foreign banks and 18 are independently-owned.

Finance companies command a substantial share of the domestic market. As at June this year, total deposits of non-bank customers with finance companies amounted to $4.8 billion. This is about one fifth of domestic non-bank deposits of $26.5 billion placed with commercial banks. At the same time, loans extended to non-bank customers by finance companies amounted to $5.7 billion, about one-sixth of the domestic loans of $35.7 billion granted by commercial banks to non-bank customers.

The existing Finance Companies Act came into effect on 10th January 1968 and, except for a few amendments made in 1969, the Act has remained unaltered. However, the operations of finance companies have expanded substantially during this period of time. Over the decade or so from 1974 to June 1984, the aggregate capital funds of finance companies have increased by five times from $209.5 million as at December 1974 to $1.1 billion as at June 1984, and their total assets have increased from $1.4 billion to $6.9 billion. The range of activities that finance companies engage in has also broadened considerably.

The recent amendment to the Banking Act aimed to rectify the inadequacies that then existed in the Act. Generally, most of the provisions of the Finance Companies Act are similar to those of the Banking Act before it was amended. It is therefore necessary that the Finance Companies Act be amended to bring it in line with the revised Banking Act, so that it would provide for effective supervision of finance companies.

I will now deal with the main provisions in the Bill.

The amendments to the Act will, in general terms:

(i) provide for an expanded definition of financing business;

(ii) ensure that control of finance companies would not pass into undesirable hands;

(iii) set more suitable limits on credit facilities that a finance company may extend to its customers;

(iv) improve the Authority's supervisory powers over finance companies; and

(v) enable the Authority to have stricter control over the audit of finance companies.

The first amendment widens the definition of financing business. The activities of finance companies have traditionally been that of collection of savings and term deposits and the channelling of such funds to hire-purchase and mortgage financing. However, the business of finance companies has evolved to include more sophisticated activities such as leasing and factoring. As such, the definition of financing business has to be amended to empower the Authority to prescribe certain operations as financing business.

To ensure that finance companies do not pass into undesirable hands, the next set of amendments appearing in clause 4 would empower the Authority to control:

(i) a takeover of a finance company by the intended acquisition of not less than 20% of its shares;

(ii) arrangements by which outside parties would be able to determine the policy of a finance company; and

(iii) the acquisition of substantial shareholdings, ie interests in 5% of the voting shares of a finance company. These amendments are the same as the amendments that have been recently effected for the Banking Act.

The next set of amendments, parallel to those effected for the Banking Act, seek to ensure that finance companies adopt high prudential standards and do not over-commit their resources. The amendments appearing in clause 7 would have the effect of:

(a) changing the existing limit which a finance company may grant credit facilities to a single customer or group of connected customers by lowering the aggregate percentage from an amount in excess of 60% of the capital funds of the finance company to 30%; and

(b) limiting substantial loans to an aggregate amount which does not exceed 50% of its total credit facilities.

A substantial loan means, in general terms, a credit facility granted to a single customer or group of connected customers which in the aggregate exceeds 15% of the finance company's capital funds.

It is recognized that the capital funds of individual finance companies vary substantially. Currently, they range from as low as $2.7 million to a high of $296.4 million. As such, finance companies with more modest capital funds might very well find that they would have to raise more capital in order to comply with the amended prudential limits. They can do this either by having shareholders inject more capital into their operations or by merging. Finance companies will be given a grace period of two years to comply with these new prudential limits.

The amendment proposed in clause 8 is designed to ensure that finance companies conduct their investment activities in a prudential manner. This provision empowers the Authority to exercise a measure of control over finance companies which seek to diversify into other undertakings to an undesirable extent. Accordingly, it provides that finance companies shall not enter into agreements to acquire interests of 20% or more in any company without obtaining the approval of the Authority.

To enable the Authority to exercise prudential supervision on a group basis, clause 8 also sets out provisions empowering the Authority to require a finance company to aggregate its assets, liabilities or profits, with those of any of its subsidiaries or related companies.

The next group of amendments appearing in clause 10 seek to enhance the Authority's powers of control over finance companies. Existing provisions in the Banking Act confer on the Authority powers to move in and take control of the bank if, for example, it is insolvent or found to be carrying on business in a manner detrimental to the interests of depositors. Under these provisions, the Authority can assume control of the bank, issue an order effecting an immediate change in the bank's management and appoint some other person to advise the bank in the proper conduct of its business. In this way, the Authority can ensure an orderly withdrawal of funds and the integrity of the bank's assets. These provisions will be incorporated into the Finance Companies Act.

An important amendment in the Banking Act was the introduction of new provisions to enable the Authority to extend the role of external auditors so that the auditors could play a supplementary supervisory role. This amendment is also proposed for the Finance Companies Act and appears in clause 12.

The other amendments made by the Bill do not warrant any special mention in addition to what has been stated in reference to them in the Explanatory Statement.

Sir, I beg to move,

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Goh Keng Swee].

Bill considered in Committee; reported without amendment; read a Third time and passed.