APPOINTMENT OF BANKING OMBUDSMAN

Mr J B Jeyaretnam asked the Deputy Prime Minister whether the Government will consider the appointment of a Banking Ombudsman to make banks more accountable to their customers.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, there is no need to appoint a Banking Ombudsman.

Banking is a competitive industry in Singapore. 153 banks operate here. Of these, 34 are full licensed banks, including 22 foreign-owned banks. They provide a full range of banking services for domestic consumers. Another 13 restricted banks focus on wholesale banking services for corporate customers.

Customers are free to use any bank. If they are dissatisfied with the services of one, they can take their business to another bank. There are enough banks to choose from. It is therefore in the interest of banks to service their customers well.

The MAS requires all banks to uphold high standards of professional conduct, so as to preserve the integrity of the financial system as a whole. The Association of Banks has also issued a Code of Conduct for banks. This Code sets out standards of good banking practice and aims to maintain a fair relationship between banks and their customers and confidence in the professionalism of banks. Consumers who feel that they have been improperly treated by a bank can bring their complaints to the ABS. The ABS helps consumers resolve their grievances with banks. The system has worked well. Besides the ABS, consumers can also take their complaints to the Consumers' Association of Singapore.

Mr Leong Horn Kee (Bishan-Toa Payoh): Sir, I wish to ask the Deputy Prime Minister whether it is true, as mentioned in recent press reports, that the banks have been deliberately curtailing their loans unduly to customers or unfairly forcing them to top-up on the value of their collaterals pledged.

BG Lee Hsien Loong: Mr Speaker, Sir, banking is a business, not a social service. Banks have to act on sound commercial considerations. They cannot afford to extend loans which are imprudent, or fail to recover loans which are not performing. Otherwise they will undermine their own viability, lose money and run into serious trouble, as recent events in several Asian countries have vividly shown.

The Government and MAS cannot persuade banks to extend loans which in the banks' judgement are not viable. If Government were to intervene, it would be obliged to compensate the banks should the loans eventually prove irrecoverable. Then we would be no different from any of the other countries, whose governments have sought to influence lending decisions of banks, and brought their banking systems to the brink of collapse, with banks carrying a very high burden of non-performing loans, and requiring government resources, in other words, taxpayers' money, to bail them out.

On the other hand, neither has the MAS required banks to curtail lending or call on their customers to top-up on the value of collateral pledged on their loans. These are matters for the banks to decide on, based on the merits of each loan and good banking practice. However, banks should take a long view of their customers' prospects and needs, rather than over-reacting to the immediate mood of the economy. A bank that expands loans recklessly in good times and contracts credit unthinkingly in bad will soon acquire a bad reputation.

The Association of Banks has recently advised its members not to take a short-term view of the viability of their customers' businesses, or to pull back loans that are being regularly serviced. Banks can be expected to be cautious in the current slowdown in the Singapore economy. But if all banks were to pull back loans precipitately, even to good borrowers, the quality of their loans as a whole will suffer. It is not in their interest to see this happen.

The evidence to date does not show that the banks are contracting credit excessively. The total volume of loans outstanding has shrunk slightly since the start of the year, but this is mostly because the demand for new loans by companies and individuals has fallen. Loans outstanding in June 1998 were 2% below the level in December 1997, although they were 5% higher than the level a year ago, in June 1997. Banks have continued to accept new loans. Among the major banks, both foreign and local, the value of new loans accepted as a percentage of loan applications was about 87% over the last three months. In June 1998 it was actually 105% but that is a statistical anomaly because of the lag between applications and acceptances, and 87% is higher than the level of 1997 when only 60% of new loans were being accepted, or in the middle of last year when 64% were being accepted before the economic slowdown.

The overall volume of bank loans also remains high. The ratio of loans to deposits in the banking system averaged 108% over the last three months. In June 1998, it was 107%. This is below the peak which was 115% at the end of last year, but it remains above the levels seen at any time in the last 10 years.

Mr Jeyaretnam: Mr Speaker, Sir, may I ask the Minister, when he says customers can complain to the ABS, is he saying that the ABS has the power to adjudicate on the complaint between the bank and the customer, and the bank has to abide by whatever decision the ABS makes?

BG Lee Hsien Loong: The ABS may not have legal powers but it has considerable persuasive powers.

Mr Jeyaretnam: Is the Minister aware that the Committee appointed to inquire into banking practices has complained about the relatively low ranking of Singapore banks in regard to openness and competitiveness as compared with foreign banks? And is the Minister aware that in many of these other countries, there is a banking ombudsman who has power to adjudicate on complaints which the bank has to accept whenever he makes a decision against the bank?

BG Lee Hsien Loong: Mr Speaker, Sir, I am not sure of the relevance of the first half of the Member's statement to the second half. Some countries have banking ombudsmen. There is one in the United Kingdom. There is one in Australia which is similar. There is one in Canada which is different. The British one has powers to award compensation of up to œ100,000. The Australian one has powers to award compensation of up to $150,000 but it is binding on the bank only when the applicant accepts the decision of the ombudsman. In Canada, neither the customers nor the banks are bound by the ombudsman's recommendations. So there are various arrangements in different countries and we have to find a form which suits Singapore. We have not found an inadequacy of persuasive powers a problem.

Dr Toh See Kiat (Aljunied): Mr Speaker, Sir, the DPM has mentioned that the ABS has a Code of Conduct. To my knowledge, this is not a public document. The ABS has never released it, and this makes it difficult for the boundaries to be known to consumers. Would the DPM say that the ABS would release this Code of Conduct for transparency purposes?

BG Lee Hsien Loong: The ABS is not a Government organisation, but we will certainly put this proposal to them to consider.

Mr Jeyaretnam: Does the Minister appreciate that the customers vis-a-vis the banks are in very, very unequal positions? The bank is a mighty institution and the customer may be a small account holder. What is the great objection to appointing an ombudsman who would look into the needs of the small account holder if he has a complaint? Does he realise that in England, these services are provided free to account holders?

BG Lee Hsien Loong: Mr Speaker, Sir, an ombudsman is not a solution to every problem, and England is not the model for every aspect of Singapore's society. We are ourselves, we have to find mechanisms which work and not encumber ourselves with formulas which look good on paper but may or may not work in practice. Even in England, the ombudsman does not have full powers on all matters. For example, he cannot deal with the issues which have to do with the bank's commercial judgement, whether or not to provide a loan, unless there has been maladministration or unfair treatment. I have not heard complaints that banks have treated customers unfairly in Singapore on a very large scale. If the Member is aware of such cases, perhaps he can bring it up to our attention and we will certainly look into the matter.

Mr Chiam See Tong (Potong Pasir): Sir, in good times the banks are flushed with money and they encourage their customers to borrow. In Singapore's case, they do borrow to buy real estate property. It was reported in yesterday's papers that in 1985

Mr Speaker: Mr Chiam, can you ask your question?

Mr Chiam See Tong: Yes, I am coming to it. The loans made by banks to property purchasers were about $10 billion and this amount has in fact grown to about $64 billion. With the downturn of the economy, it would look like many of these property purchasers would have to either top-up or, if they are unable to top-up, pay higher monthly interest. They will have to fork out ---

Mr Speaker: Mr Chiam, are you making a speech? Can you get to the point? If you are not asking a question, I will ask you to resume your seat.

Mr Chiam See Tong: All right. It would appear that many of these property purchasers would have to sell their properties under forced sale. Is the Government, in the absence of an ombudsman, just going to stand by and see this happen?

BG Lee Hsien Loong: Mr Speaker, Sir, whether a person takes a loan or does not take a loan is a personal decision. If he had gone to the bank to take a loan, that means he did not buy an HDB flat. He had bought a private property, and I presume that he had made his own calculations, and he has to look after himself. I would not be surprised if the volume of housing loans has increased dramatically since 1985. The number of private properties has gone up, the value of private properties has gone up even now compared to 1985, and if bank loans had not increased, I think our system would have been malfunctioning. So these matters are private decisions between the banks and the borrowers. As I explained, even in countries where you have an ombudsman, lending decisions are really the bank's prerogative, not the ombudsman's prerogative. If the ombudsman has to decide that you may call back this loan or you may not call back that loan, and the ombudsman says that you cannot call back the loan and the loan turns sour, who pays? The bank or the ombudsman? Is the ombudsman a rich man or does he have the government standing behind him? So it is not such a simple matter.

The lesson I draw from the data which Mr Chiam cited is that we have to be very careful not to over expand credit during times when the property market is hot and there is a certain euphoria and heady whiff in the air, and everybody feels this is the chance, the bankers feel these are safe loans, the borrowers feel this is a sure chance to make money, let's go. This is why, in 1996, we set a limit of 80% of the value of a property on mortgage loans, and which is why even now, despite many very strong appeals to the contrary, we have not lifted this requirement, and I hope Mr Chiam will support us in that resolution.

Mr Chiam See Tong: Sir, my issue is that this is the real situation. It has already happened and a big amount of loan has been given out by the banks and, also, very likely many of these loans would be recalled because there are house purchasers who are unable to pay. So my question is: is the Government just standing by and watching these many poor purchasers having to go bankrupt? As it is already, 1,000 of them have gone bankrupt.

BG Lee Hsien Loong: Mr Speaker, Sir, I have just explained that the Association of Banks has advised its members not to take a short term view of the viability of their customers' businesses or to pull back loans that are being regularly serviced. I am sure the Association would not mind me telling the Member that, in terms of housing loans, what they have suggested to the banks is to consider not requiring top ups where the term loan repayments are current, and to look at it case by case and support customers who have viable businesses, and help them to weather the current difficult environment. I think these are for banks to decide. If the bank wants to pull back a loan because the customer is not servicing, and we tell the bank, "No", do you take on the responsibility? I am not prepared to take on the responsibility because I would have to come here and ask Members to vote money which may be in the billions of dollars, in the case of Japan, US$600 billion. We should go to the banks not to rescue a bank, but to make sure the whole banking system does not collapse, and the whole economy does not collapse. I would rather not have to make such a request of Mr Chiam.

Mr Jeyaretnam: The Minister, if I heard him correctly, says that, even in England, it does not work in practice to the full satisfaction of the customers or something to that effect. Has he made a study of how it works in practice in England?

BG Lee Hsien Loong: Mr Speaker, Sir, the Member misheard me. I never said it did not work in practice in England. I have no idea whether the customers are fully satisfied or not. I imagine that there will always be some customers who are not fully satisfied. What I did say is that, in England, there are certain things which the ombudsman's office cannot deal with, and one of them is complaints about the bank's commercial judgement whether or not to provide a loan.