CREDIT CARD COMPANIES (Interest rate on roll over balances)

Dr Kanwaljit Soin asked the Minister for Finance on what basis the Monetary Authority of Singapore allows credit card companies to charge 24% interest rate per annum on the roll over balances of their clients when banks only charge an annual interest rate of 6-9% for overdrafts.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, there are presently 12 credit and charge card issuers in Singapore of which 10 are banks. As Singapore is a free market economy, the Monetary Authority of Singapore does not regulate interest rates charged by financial institutions, as I have said earlier, including banks and credit and charge card companies, for the granting of credit facilities. These are commercial decisions made entirely by the financial institutions based on market competition.

It should be noted that cardholders are not obliged to pay interest on their card spending. Interest is charged by card issuers only if full payment is not made by cardholders by due date. Credit and charge cardholders who do not wish to incur interest charges on their card spending should pay up their dues promptly to the card issuer by due date.

The 24% interest rate charged by card issuers is stated in the terms and conditions of the credit/charge card and is therefore known to cardholders. Such rate of interest is also imposed on credit/charge card debts in many other countries. The relatively high rate of interest charged by credit and charge card issuers is to compensate them for the credit risk which they undertake and the relatively low annual fees which they impose for the convenience of making purchases via the use of credit/charge card.

However, in order to highlight to cardholders the interest charges which they will have to bear if they do not pay their credit/charge card debts promptly, MAS will be requiring card issuers to print more prominently on their billing statement the interest rates which the card issuers would charge cardholders for failing to pay their credit/charge card spending by due date and the manner in which such charges would be imposed.

Dr Kanwaljit Soin (Nominated Member): Sir, would the Minister consider that it may be better for the consumer if the conditions for getting a credit card are tightened up so that credit card companies will have less bad debts and people who use credit cards will not be charged exorbitant rates for roll over balances?

Dr Richard Hu Tsu Tau: The conditions for issuance of credit cards have already been tightened up and, in fact, it has begun to slow down the rate of card issuance. As I have explained, 24% may sound a lot but, in fact, the nominal charges which the bank levies are very low. If you do not want to pay the 24%, you can easily adjust it by paying up on due date.

Dr Kanwaljit Soin: Sir, would the Minister agree that credit card companies are making money from the fees that they charge the companies which subscribe to them? And would the Minister agree that the ordinary consumers need some protection and they are looking to the MAS for that?

Dr Richard Hu Tsu Tau: Yes, of course, they are making profits, otherwise they would not be doing business. But the protection is already provided by MAS and I think consumers should not always rely on the regulatory authority to protect their interests. The best course is to restrain their expenditure wherever they can.

Mr Koo Tsai Kee (Tanjong Pagar GRC): Why do we place so much faith in self-regulation by the Association of Banks in Singapore when their directive has blatantly been ignored in the last two years?

Dr Richard Hu Tsu Tau: I am not aware of what directive has been ignored.

Mr Koo Tsai Kee: The directive that they should state the effective annual interest rate somewhere prominently so that consumers can see it at first glance.

Dr Richard Hu Tsu Tau: They are now required to do so. I think that impression is being corrected. In this case, I think over-regulation is uncalled for.

Mr Koo Tsai Kee: Would the Minister say that America, Britain and Australia are free market economies?

Dr Richard Hu Tsu Tau: Yes. What is the question?

Mr Koo Tsai Kee: The point is that you are implying there is no need for legislation in Singapore because we are a free market economy.

Dr Richard Hu Tsu Tau: We have regulation here. But we should not over-regulate. It is not that we should not have any regulation whatsoever.

Mr Koo Tsai Kee: Would the Minister agree that we are under-regulated?

Dr Richard Hu Tsu Tau: Not in this particular case.

Mr Koo Tsai Kee: But why is it that legislation is so difficult?

Dr Richard Hu Tsu Tau: It is not a question of difficulty. It is whether it is necessary.

Mr Chng Hee Kok (Tampines GRC): Sir, the question of effective interest rates has been raised several times with the Minister. Many Singaporeans are house-owners and today banks are not charging effective interest rates, despite what the Minister has said. Would the Minister at least look into making sure that banks charge effective interest rates or inform consumers that they are charging effective interest rates?

Dr Richard Hu Tsu Tau: I do not quite understand the issue. The effective interest rate is what they are charging you. But whether you know it is a different thing. I am not sure exactly what the Member means.

Mr Chng Hee Kok: If the Minister checks with the MAS officials he will find that the rates charged by banks on housing loans are not effective interest rates because they charge on an annual rest basis divided by 12 months, whereas effective interest rates mean on a monthly-rest basis.

Dr Richard Hu Tsu Tau: No, that is a question of definition. Effective interest rate is what you actually pay. Whether or not you know it is a secondary problem.

Mr Chng Hee Kok: I am sorry I have to correct this point, Sir. Perhaps the Minister will confirm this ? but I will raise a Question in a future sitting ? that interest rates on housing loans are not effective interest rates.

Dr Richard Hu Tsu Tau: I suggest that the Member submit a Question because I am not quite sure exactly what he means.