POST OFFICE SAVINGS BANK OF SINGAPORE (TRANSFER OF UNDERTAKINGS AND DISSOLUTION) BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill before the House mainly deals with the transfer of the undertakings and employees of POSBank and Credit POSB to DBS, the dissolution of POSBank and the repeal of the Post Office Savings Bank of Singapore Act. It transfers POSBank's existing property, rights and liabilities to DBS, excluding a list of assets and liabilities and makes the necessary arrangements for the transfer.

The Government announced the privatisation of POSBank and its acquisition by DBS for $1.6 billion on 24th July 1998. DBS will pay for it with new non-voting convertible DBS preference shares. I would now take the House through the rationale underlying the privatisation of POSBank.

Rationale for privatisation

POSBank was set up in 1972. Its specific purpose was to promote thrift and saving among Singaporeans. POSBank has fulfilled this function very well. The objective of encouraging savings remains valid today. However, the banking environment has changed substantially since POSBank's inception more than 25 years ago. The large mass of depositors now have access to the local retail banks, which are able to offer them a full range of competitive services. Not being a commercial bank, POSBank cannot offer the full range of services such as fixed deposits, foreign currency deposits, asset management services and so on. At the same time, it is facing tough competition in its core business, ie, its deposit-gathering business, which it is not in a strong position to counter.

POSBank's depositors have become more sophisticated. As other banking avenues have opened up, they are much more aware that they may be better served elsewhere. For instance, when the gap in interest rates on savings deposits between POSBank and commercial banks increased last year, these depositors were quick to move their deposits to the commercial banks. Government has concluded that the idea of a limited function savings bank is largely out of step with the times. There can be a continuing role for POSBank, but only if it is competitive with full banks. We believe that enabling it to compete as a full bank via merger with DBS is the best way forward. This would enable Government to lift the fetters that have constrained its operations and distorted market signals and consumer behaviour.

It is also useful to note that most developed countries, and many of our Asian counterparts, no longer operate post office savings banks or national savings banks. The list includes USA, Australia, New Zealand, Hong Kong, Taiwan, and Indonesia. Norway and Germany's national savings banks are also being privatised, with commercial banks likely to take control. In the region, only India, Japan and Thailand still operate national savings banks.

Transitional arrangements

The tax exemption on POSBank deposits is one example of how the constraints on POSBank, built up over time, had led to a situation where our regulations increasingly risked losing their original purpose. The reason for granting POSBank's tax exempt status was to encourage small depositors to save. However, over the years, personal income tax rates have been brought down to such a degree that nowadays, most small depositors no longer pay any income tax, and so do not benefit from the tax exemption. POSBank's data show that some 85% of their depositors do not pay income tax. The tax exemption therefore ended up benefiting only 15% of POSBank's depositor base, primarily the large depositors with high income and high marginal income tax rates. This is not the group that the tax exempt status was intended to help. We are therefore no longer serving the original policy intent. To compound the problem, Government had imposed constraints on POSBank's investment and lending activities in the belief that POSBank's tax exempt status should not unfairly disadvantage the commercial banks. This led to product limitation, low savings interest rates, and a lack of alternative uses for its deposits. This in turn resulted in Credit POSB pricing its mortgages below market rates, in its drive to gain market share within POSBank's limited scope of business. In effect, the good intentions of the tax exempt status had resulted in Government providing subsidised mortgage financing for private housing. This was not Government's intention. There is little public policy justification for it.

The Government recognises that these market distortions have to go. However, to ease the burden of adjustment in this privatisation exercise, we are taking care to ensure that painful disruptions for POSBank's depositors and borrowers are minimised. We therefore set out a transitional arrangement to help all parties adjust over time. For depositors, the removal of tax exemption will be phased over a period of six years; it will be entirely removed only from 1st January 2005 onwards. To ease the burden of adjustment for existing borrowers, the Government has asked DBS to maintain the differential gap between POSBank and DBS mortgage rates of between 1.5% and 1.75% until the end of 1999, and thereafter to close it gradually over a three-year period. This four-year transition is more than fair.

No better alternative to merging with DBS

A viable future for POSBank requires it to be competitive with full banks. But the financial services environment today is a very tough place. With rapid developments in the variety and complexity of financial products, banks can only compete effectively by having the strength to carry increased market and currency risks, and larger asset size to reap economies of scale. This is why the Government has been encouraging our local banks to consolidate. Within this framework, it makes most sense for POSBank to merge with a successful local bank than to strike out on its own. This route would best enable it to serve its customers better. This would of course also help set the pace for the other banks.

DBS was a natural choice as the most suitable partner for POSBank. Since the Government is a major shareholder of DBS, it can be more confident that DBS will preserve the spirit of POSBank's social responsibilities. The merger will at the same time significantly strengthen Singapore's banking sector for international competition.

Specific provisions of the Bill

I shall now proceed to explain the specific key provisions of the Bill, which are:

(a) Clauses 3 and 18: Transfer/Dissolution dates

Instead of the usual practice of dissolving the statutory board and simultaneously transferring all the assets and liabilities to the successor company, the transfer date and the dissolution date will be distinct. This is to allow Government to comply with Presidential safeguards on the protection of reserves, which will be covered in the Second Reading speech on the Constitution of the Republic of Singapore (Amendment No. 2) Bill.

(b) Clause 4(3): Excluded assets and liabilities

DBS will not be taking over all the undertakings of POSBank in this transaction. There will be some assets and liabilities left with the Government, including the POSBank Tower and some equity and bond investments. DBS has asked the Government to retain POSBank Tower, which is still under construction, as DBS has no need for another large Headquarters Building. The equities and bonds held back by the Government are to enable DBS to comply with section 31 of the Banking Act, which requires that the investments of a bank should not exceed 40% of its capital funds. The assets retained by Government amount to about $1 billion. The list to be specified under this clause spells out the assets and liabilities that are being retained by the Government; all other assets and liabilities will legally be transferred to DBS.

(c) Clause 7(7): Supplementary provisions on disclosure of information

The secrecy provisions contained in section 47 of the Banking Act, which does not apply to POSBank prior to the transfer, forbids banks to reveal any information on their customers' accounts, unless, among other conditions, the customer or his personal representatives had given written permission to do so. Therefore, POSBank's terms and conditions for its accounts as well as Credit POSB's loan agreements, unlike the commercial banks, generally do not contain disclosure authorisation clauses. The POSBank accounts, including Credit POSB's loan portfolio, to be transferred to DBS will be subject to this provision. Like most banks, DBS obtains its customers' written consent as a standard feature in its account documents and loan agreements. To put POSBank customers on the same footing as existing DBS customers, DBS can write to every POSBank customer to seek written permission, but it would be obviously impractical to do so. There is no guarantee that these customers will agree or even bother to reply to give consent. This clause therefore allows DBS to disclose information only for the administration of POSBank customers' accounts, and only insofar as it is in line with DBS' existing practice. I should point out that in practice, this clause is not a material change because POSBank has had, and has been disclosing such information to third parties all these years where required in the normal course of its work. The proposed amendment essentially ensures that DBS would be able to administer the POSBank accounts after the transfer, in a manner which complies with the Banking Act and with minimal inconvenience to POSBank's 3 million customers, so that the transfer of POSBank to DBS is as seamless as possible.

(d) Clause 8: Staff provisions.

As with other privatisation exercises, all POSBank and Credit POSB staff would cross over to DBS at existing terms and conditions of service. DBS has stated that, as far as possible, it will retain and re-train POSBank staff, to provide them with better prospects and broader career opportunities.

(e) Clause 15: Consideration shares.

DBS' purchase consideration would be offered to the Government in the form of non-voting preference shares, instead of ordinary voting shares. These preference shares enjoy the same dividend rate as ordinary shares. They will not be listed on the Stock Exchange, but would be convertible to ordinary shares which can then be sold. However, the Government has committed not to sell the shares until 2002 at the earliest. The preference shares will be convertible on a 60(Local):40(Foreign) ratio so as not to upset the existing Local/Foreign tranche balance.

(f) Clause 18: Repeal of the POSBank Act.

This Bill will repeal most sections of the existing POSBank Act with effect from the Transfer Date. However, certain sections of the Act will still be retained, and will only be repealed upon POSBank's Dissolution Date. This is to allow POSBank to remain as a shell statutory board to see through the disposal of its residual assets and to finalise any management issues remaining.

(g) Clause 19 and the Schedule: Consequential amendments to other laws.

The Income Tax Act will be amended to allow for the extension of tax exemption on POSBank savings deposits, for both existing and new POSBank accounts. Consequential amendments are also made to other Acts. Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee: Mr Speaker, Sir, the object of this Bill is to implement the Government's decision to allow DBS to buy POSBank. As explained by the Minister, this move to merge the two large Government-owned financial institutions is motivated by the desire to create a new super Singaporean bank to support and spearhead the plan to push Singapore as a regional financial centre. My view is that this objective can be supported. A larger, better capitalised Singapore bank will therefore have better resources to compete in the regional markets. Local depositors will also get to enjoy a wider range of financial services and facilities.

However, the merger of POSBank with DBS will mean the dissolution of one of the most loved and trusted financial institutions in Singapore. The POSBank has been a symbol or icon of the virtue of thrift in Singapore. We lament the passing of this powerful icon of thrift for Singaporeans. We can recall the days in the seventies when as young students, we were encouraged by our schools and parents to save a little of our daily pocket money and deposit them into POSBank. Over the years, we have learnt to save and put out trust in POSBank.

The merger of DBS and POSBank would mean that a larger bank will serve the local depositors. But I would like to point out that a larger bank does not necessarily equate to better facilities or a safer bank for depositors. Allow me to elaborate.

No doubt there will be better resources and with more advanced computer technology, the enlarged DBS can create more services and facilities. However, many of the original POSBank customers, especially the older folks, would not go near an ATM and they would prefer their monies to be put and recorded in POSBank passbooks, instead of holding them as passcards which they cannot read and see. The POSBank customers are also quite satisfied with the service provided by the friendly smiles of the POSBank tellers and the 133 conveniently located branches. This large pool of housewives and older folks do not need better services. They are indeed very happy enough with the present services of POSBank.

It also does not mean that a super bank is a safer bank. Super banks can make super mistakes. There were instances of large banks around the world, eg, in America, Europe, Japan, where they have to be rescued by the government on the brink of collapse. Hence, many of our local depositors see the POSBank, which is Government-owned and Government-backed, as a AAA credit-rated savings bank that they can trust fully. Now the enlarged DBS may not give them the same sense of security. POSBank depositors do not mind the slightly lower interest rates in return for better security and better convenience, and they can sleep well.

As reported in the press, DBS' acquisition of POSBank has raised two main concerns. One is the possibility of higher home loan interest rates and the loss of the Government's guarantee on deposits which POSBank offers. The Minister has just a moment ago explained how DBS will take certain measures to alleviate the above worries of depositors. I hope the Minister can do more.

Mr Chiam See Tong: Sir, the Post Office Savings Bank is an institution in Singapore which is synonymous with saving. Saving is, of course, a virtue which the State should inculcate among its citizens. The State wants its citizens to save. That is why it gives incentives for people to save. The deposits in the POSBank accounts are tax exempt up to a limit. Almost every man in the street in Singapore in his lifetime has a POSBank savings account. But with the merger, the image of the POSBank as the people's bank shall be taken away. The tax exempt concession enjoyed by Singaporeans for the last 26 years shall also come to an end, except for those below 21 years of age and those who are serving National Service. This concession has very little benefit because most of those who are below 21 years of age have not started working. As for those serving National Service, their NS pay is very low. Hence, even if they save the whole of their NS allowance, the amount of interest accrued is very little.

All in all, the tax concession given to those below 21 years of age and those serving NS is insignificant and not meaningful. The people who are most unhappy are the people who have taken loans from Credit POSB to buy homes of their own and future purchasers of property for their own use. The POSBank is a source of cheap funds for people who want to purchase a property. The difference of interest rate between that offered by Credit POSB and the commercial bank is about 1.5%. Credit POSB's rate is lower than the commercial banks' rate.

In view of the high property prices, up to January of last year, the amounts borrowed by home purchasers are very high. The monthly interest paid is correspondingly high. The home owners have to seek loans from private commercial banks when the grace period given by Credit POSB ends on 31st December 2002, and they have to pay substantially more. It was reported in the Straits Times of 28th July 1998 that home owners had to pay between $78 and $103 more a month for every $100,000 loan when Credit POSB's cheap housing loans are phased out by 2002, provided interest rates remain the same. Those who have taken a 25 or 30 years' loan shall be the most hard hit as their monthly repayment amounts are higher.

With the economic downturn and property values have also nose-dived, the banks are not going to show magnanimity. They want their customers to top up or make bigger monthly repayment amounts. In one Straits Times' report, a borrower was asked by the bank to pay $4,000 more each month. This may be an exception but such horror stories go to make people aware that once property prices fall, all kinds of hardship can occur.

In the light of the bad economic situation, I would urge the Minister to extend the grace period of increasing the interest rates of Credit POSB to those of the commercial ones to six years rather than four years. As regards the purchase of POSBank by DBS, newspapers had commented that DBS got POSBank rather cheaply at $1.6 billion. The purchase price paid by DBS for POSBank is 1.37 times of its tangible asset value, and this is said to be below the norm, which is about 2 to 2.5 times for banks. I would like the Minister to comment on this.

I would also like to ask the Minister why is the takeover of POSBank taking place at this point of time. Has DBS lost too much money in its overseas investments and needed help? We all know that POSBank has about $25 billion of depositors' cash. Is DBS eyeing that amount of money to bail itself out of its losses? I wish the Minister could enlighten us.

Mr Shriniwas Rai: Mr Speaker, Sir, thank you for giving me this opportunity to speak on the Bill. I am in support of the Bill, although I have some reservations with some clauses which I will come to later.

Sir, the proposed merger of the Post Office Savings Bank with the Development Bank of Singapore has drawn a great deal of public interest. This is because POSBank has been regarded as a national institution. Though the Act came into being only 25 years ago, the institution has existed for almost a century.

Many of us remember starting our savings through the Post Office bank accounts. In the early days, we used to buy stamps and we would stick them to a book. Of course, new Members may not realise it, but this is the way we were encouraged to save. Sir, a larger question that the House would be interested in is that, in the interest of the financial institutions in Singapore and the banking industry in particular - I have mentioned this earlier and I reiterate - we should have not more than two to three banks, and the signal should be sent to the other banks that they should consider merging in the greater interest of financial institutions in Singapore. This trend is seen all over the world, in USA and Japan. In fact, recently in India, there was a report on banking. They too encourage merger. I think it is timely. Of course, I share some of the grievances Mr Chiam has mentioned earlier. I urge the Minister to consider the grace period. He has asked for six years. I think it is a fair figure. At least it should be more than four years.

Sir, members of the public have asked why is there a need to have this merger now. Is it to bolster the DBS' financial position? The Minister should state the position to this House so that, once and for all, we have these doubts cleared in the minds of the public.

The other question which many people have asked is why did Post Office Savings Bank go with DBS, and why not other commercial banks. This is like a marriage. You do not propose yourself to many suitors. You look for suitors and then decide. Both of them share a common background, being Government-linked companies. So I do not see any wrong. In fact, it is quite appropriate for these two institutions to merge and the public should take it in this spirit. I am sure when the other banks are going to merge, they would merge with those banks which are near and dear to them. They are not going to marry somebody who is not close to them.

Sir, there is another aspect which I would urge the Minister to convey to DBS. I have been a user of Post Office Savings Bank, and the friendly service is something which I hope would be continued by DBS so that the man-in-the-street will find the service as good, if not better.

On that note, I support the Bill.

Dr Vasoo: Thank you, Mr Speaker, for allowing me to join in the debate on the Bill.

Sir, it is indeed a pity to dissolve POSBank. POSBank has tremendous historical value, a long history, and a lot of people are associated with it. If you ask the account holders whether POSBank should be closed, I can tell you that they will say that it should be kept going. And I feel, at this stage, it is more important to see that we do not short-change the account holders of POSBank.

Sir, there are about 3 million POSBank account holders and that is a tremendous following which we should recognise. We also know that POSBank has been making money and for a bank which has been making money, I do not understand the reason why it should be closed down. I could understand the need for amalgamation. But if we so decide to amalgamate, it is important to look at this transition to ensure that the 3 million account holders are to an extent supported and the transition does not bring serious impact on them and they will support the change. This is a crucial issue that the Minister should look into. I see that there are many people in the working class who are associated with POSBank and their sentiments and loyalty should be appreciated. I hope DBS will continue to provide the same service and maintain the relationship that has been established with many people in the working class who are account holders.

POSBank, as Members know, has a very wide reach. It reaches the old, the young, and the housewives in the many housing estates. And I hope that with this amalgamation, DBS would be able to find the same reach to the neigbourhoods in the housing estates. There are concerns that the reach may not be there and it may cause dislocation, particularly to the older account holders, and the young ones too. POSBank has become very visible. If you move around the various housing estates, you will find POSBank in many locations, and that is the widest reach that we should look at. That would be the objectives for which banks should strive to meet and it is important to look at the dislocation it would cause as a result of this change.

There are several implications that one needs to pay attention to. One is the service charge, ie, whether service charge to small account holders could be reviewed and whether DBS could be advised that the service charge would not be raised unnecessarily at the expense of the small account holders.

Secondly, housing loan. It is very important to examine the housing loan issue because many of those who have taken housing loans with the expectation that loan changes would not be that dramatic. I personally feel that the terms of the housing loans of these people should be honoured. The agreement which they have entered with Credit POSB should be honoured by DBS itself, at least for a longer period. For these people, there should be no changes in loan terms which have been accorded by Credit POSB. That I think would be keeping in good faith with these people who have taken their housing loans with Credit POSB.

The third area is to ensure that the banking service to ordinary account holders, particularly the old, young and children, would not be displaced as a result of these changes. I hope that would be taken into serious account in this transition. The Minister should ensure that DBS looks into the question of support for the ordinary account holders who have given well-established support over a long period of time.

Mr Chew Heng Ching (East Coast): Sir, I rise to support the Bill. I am pleased that, despite the trying times that our economy is going through, the Government has the foresight and determination to ensure that Singapore comes out of this crisis stronger and better able to meet the challenges of the changing world.

The commercialisation of POSBank is timely as it forces our GLCs and our banking system to be more efficient, enabling the domestic market to employ capital more effectively so as to compete on the same footing as the larger players in the global market. We cannot afford to allow subsidies in the cost of capital to distort investment decisions of our GLCs or even purchase considerations of individuals financing their homes. Our GLCs would have to be able to make commercial decisions based on market realities so as to realise their full potential and not be molly-coddled by easy access to cheap funds. Similarly, cheaper access to credit from Credit POSB could have contributed to the present housing market over-shooting in the mid-1990s with the resultant effect being a drag on the economy and on the individuals.

In specific, Sir, the resultant DBS-POSBank entity would have the capacity to undertake larger projects as Asia rebuilds itself and serves as a spur to encourage other Singapore banks to consolidate in line with the global trends in the financial industry. It is indeed critical that for Singapore to be a major financial centre, we should have the infrastructure in place and the underlying efficiency in our domestic banks and the capital markets to cater for this development. The sale of POSBank to DBS would serve as a catalyst and as a spring board for faster progress in these fields.

There has been some disquiet over the specifics relating to the sale of POSBank to DBS. Most of the public concerns are with regard to the possible rise in the cost of servicing their Credit POSB mortgages. I am appreciative that the Government has mandated DBS to start re-pricing the mortgage rates to market levels only from the end of 1999 onwards over the next three years, as the Minister has explained. Effectively, this allows for a four-year transition period and presumably the Minister is assuming that economic recovery will happen, perhaps in the Year 2000, for this transition period to take place.

By removing subsidies across all levels and benefiting the majority of POSBank depositors, the Government has indeed been very astute in nipping a potential problem in the bud. This could ensure that our financial system remains strong, our banks remain healthy and we can thus avoid the pitfalls of potential bank failures that are dragging down some of the economies in the region.

However, given that there is no clear end to the current economic crisis, I want to ask the Minister whether it would be possible to have perhaps a caveat or provision put in place. That caveat or provision is that the present four-year transition period will hold, subject to a review at the end of 1999 whereupon, if the economic crisis worsens or deepens, and if economic recovery is further delayed, then extend the transition period accordingly, beyond four years, maybe five, six, seven or eight years. I believe this would alleviate some of the present concerns of the public over the commercialisation of POSBank as it would be a clear indication that the Government is prepared to be flexible should circumstances require.

Further, whilst the Bill deals extensively with the transfer of business undertakings to DBS, there is no mention in the Bill with regard to the tenure of employment for employees of POSBank save to say that the existing employment contracts would be continuing under the DBS entity. Would the Minister consider it necessary to include provisions in the Bill for POSBank employees in order to safeguard their employment interests in this period of uncertainty, at least for a minimum period of one year, ie, would the Minister ensure that these POSB employees would not be retrenched for at least a period of one year following the merger of the two banks?

Finally, the Minister has said that POSBank was offered only to DBS as the latter bank was the natural choice because of a common denominator - Government ownership. May I suggest that the Minister give a full explanation on this, because the concern of the public, the citizens at large, is that the Government could have obtained a higher price for POSBank through a more transparent and open tender system, and this will benefit the majority of the taxpayers. Would the Minister shed more light on this?

Mr S. Iswaran (West Coast): Sir, the Minister has given us a compelling economic case for the acquisition of POSBank by DBS. Liberalisation of the financial services sector under the auspices of WTO and information technology will redefine the nature of banking and the recent mega-mergers in North America and Europe are symptomatic of these changes. Therefore, an entity with the combined strength of DBS and POSBank will certainly be in a better position to compete in this brave new world of financial services. And that is why I support this Bill.

Nothwithstanding, these forceful cerebral arguments, it is with a tinge of sadness and nostalgia that I join this debate. Indeed, the Minister's speech sounded much like a requiem for a national institution. POSBank, as many of my colleagues have already said, has been an indelible part of Singaporeans' life and it has offered a friendly and non-threatening face in what would otherwise be a cool, if not cold, world of banking. And this has encouraged many, including the young and perhaps those not so accustomed to the world of finance, to take up savings.

The acquisition of POSBank by DBS begs the question how the Government can ensure that savings and thrift continue to be promoted amongst Singaporeans, particularly the young. One of the key lessons of the current regional economic crisis is the value of savings and the habit of thrift. We can argue that Singaporeans are more sophisticated but even in sophisticated economies, saving is not a necessary factor of their lives. It is important that we continue to imbue our young with these values. I do not mean to suggest that commercial banks do not do this but this is not their raison d'etre. After all, we do not hear commercial banks telling us or urging us to save for tomorrow because tomorrow is worth saving for.

Sir, on the point of tax exemption and the liberalisation of mortgage rates, as I understand it, tax exemption will be completely lifted from 1st January 2005. Tax exemption on interest earned on POSBank savings deposits will continue on all deposits till the end of December 2001 and thereafter, it will be extended to the first $100,000 in the balance of each POSBank savings account depositor. This means that this merged entity will enjoy a subsidy of sorts from the Government till the end of 2004, albeit at reducing levels.

On the other hand, Credit POSB's home loan mortgage rates will be allowed to gradually rise to competitive market rates from 1st January 2000. Sir, I wonder whether it is not possible for Credit POSB's mortgage rates to be sustained at current levels vis-a-vis DBS' commercial rates, at least until the first tier of tax exemption is removed on 1st January 2002. After all, I think the bank enjoys a certain subsidy and it seems out of sync that, on the one hand, the banks receive a subsidy which will be gradually removed but, on the other hand, the liberalisation of its mortgage rates is executed much earlier. I would appreciate it if the Minister could comment on this.

I would also like to declare my interest as an employee of Temasek Holdings.

Dr Toh See Kiat (Aljunied): Mr Speaker, Sir, I rise to support this Bill. Nevertheless, there are some concerns which I would like to raise for the Minister's consideration in the implementation of the provisions of this Bill.

The passing of the POSBank will be a social and historical milestone. Singaporeans will have many sentimental memories of POSBank, which has been the national savings bank for decades. Set up by the British in 1877, it was operated as an arm of the Post Office and intended to be the poor man's bank. The modern POSBank began on 11th July 1966 with an initial staff of 35 and became a statutory board in 1972. It played an important role in the shaping of Singapore as we see it today, particularly in amassing the small savings of individuals in the whole nation for the building of national infrastructure. As some of my colleagues have also pointed out, the POSBank was a non-intimidating place in the neighbourhood where those without very much money could go in to obtain banking services without fear of embarrassment, humilation or having to be sophisticated.

The Bank's objective was clearly defined in 1872 as, "to encourage those in receipt of small incomes to practise economy by affording them a safe investment for small amounts at a fair rate of interest, and also of affording borrowers opportunities of obtaining loans at lower rates of interest than were procurable from other sources."

According to the Post Office Savings Bank Act, which will be repealed today if the Bill is passed, the principal objective of the Bank shall be "to provide means for the deposit of savings and encourage thrift; to mobilise domestic savings for the purpose of public development ." The corporate policy of POSBank has been reaching a maximum number of people by providing services and incentives in a number of areas related to the promotion of the savings habit. Basic banking services are made easily accessible to the public and convenience to the consumer is a cornerstone of that policy, with branches and automated teller machines (ATMs) in practically every corner of Singapore and especially in the Housing and Development Board estates.

As early as 1983 actually, the Government had already considered converting the POSBank into a full commercial bank. However, after a review, the plan was not proceeded with, as it was not in the national interest then. Throughout its history, the POSBank has been a key institution of our financial industry, innovating and pushing the development of services, such as the ubiquitous ATM we have now and the NETS card, when the commercial banks were cautious, reluctant or perhaps even apathetic to the use of new technology and services. They were able to see the wider national interest untrammelled by the desire of their shareholders to minimise risk and costs and maximise profit; and they had vast resources to implement their dreams. If one were to look at this solution that is proposed, we could actually view this as the final sacrifice of the POSBank for the national interest to make our Singapore banks fit to fight the wars that are coming up in the global economy that is broadening. But perhaps it is still necessary for some institution that could serve this role of a catalyst in the banking industry to prod and goad the other banks into doing things that they perhaps are reluctant to do for various reasons.

The reasons for the acquisition of the POSBank by DBS have been mentioned by the Minister. Effectively, the Minister says that there are two choices: one is to amend the Post Office Savings Bank Act to give the Post Office Savings Bank wider latitude to offer full banking services; and the other is to merge with a commercial bank because in this world that we have now, size does matter.

These objectives laid down by the Minister in his speech are laudable objectives, but this does not mean that the objectives of the POSBank I have enumerated earlier are irrelevant now. The POSBank may need to re-engineer itself in the national interest for the new millennium and the era of the international mega-banks. But we must find alternative sources of low-cost loans and safe investments for the millions of small account holders, the 92,000 small and medium enterprises and the 23,000 hawkers and other sundry shopkeepers and stallholders. For these people, the POSBank has met their needs very well and these are not very sophisticated needs and they see no reason to dissolve the POSBank. There is after all still a social objective that a national institution like the POSBank can serve, the social initiative of promoting thrift and saving.

I urge the Minister to educate the public on the existence of the other financial institutions which we have and which I believe will be more than happy to move into the gap left by the POSBank. These are the institutions such as NTUC Income, NTUC Thrift and Loan Society and the numerous other thrift and loan societies, credit unions and cooperatives in Singapore. Alternative financial institutions like these should also be promoted, allowed to expand if need be, be given tax exemptions and the rules for their setting up liberalised so that the original objectives of the POSBank, ie, promoting thrift, savings, safe investments and low-cost loans for the small income earners, all these would remain possible in these troubled economic times.

As to its impact on the employees of the POSBank, I am glad to note that clause 8 of the Bill provides that these employees will be absorbed into DBS on the same terms as they received in the POSBank. This is important as they had many of the benefits of statutory board employees which they will now lose with the merger if not for clause 8.

There is another concern which is not reflected in the Bill and this relates to the down-sizing and possible retrenchment of the POSBank employees, as some of my colleagues in this House have mentioned. I hope the Minister will assure this House that no undue economic hardship will be laid on the shoulders of these employees. Besides retraining them for new jobs, perhaps a job placement service could also be initiated to assist in their transition.

I laud the Minister for the various plans he has already put in place to phase in the changes such as higher commercial lending rates and the loss of tax exemption, and for gingerly balancing the national interest against the interest of the small account holders and small businessmen, so as to smoothen the unhappiness and sorrow at losing a key national institution which, in the public mind, has not lost its relevance yet. But I wish to call for more practical steps to allay the fears of consumers that they would soon be put in severe financial straits and be made bankrupt. One way to do this may be to allow the novation or assignment of the POSBank loans to selected thrift and loan societies where the circumstances permit it, rather than force all the accounts to be transferred to DBS. This gives the consumer the choice of the financial institution he wishes now to put his trust in.

The future, Mr Speaker, Sir, is a frightening prospect, and even big banks in other countries have collapsed, as some of my colleagues have mentioned in their earlier speeches. I urge the Minister to ease the pain for the POSBank small account holders and employees. Ease them gently into the dark night that they face and give them a strong light to guide them through. 2.30 pm

Dr Tan Cheng Bock (Ayer Rajah): Mr Speaker, Sir, I support the Bill.

The acquisition of the POSBank came as a surprise to most Singaporeans. For the keen observers of the financial sector, this acquisition may have been anticipated once the Keppel Bank-Tat Lee Bank merger was announced. A merger of smaller banks and the bigger ones is also the new paradigm of the financial services review that is being spearheaded by Deputy Prime Minister. Given the global mega-merger of big banks, one cannot go against the trend if banks in Singapore are to survive. The merger of the Dutch POSBank with NMB Bank and subsequently with Nationale Netherland to form the ING group in Europe and the Travellers Group with Citibank in America are examples of this global trend.

I discussed this subject with Dr Wang Kai Yuen, who is a board member of the POSBank since 1987, and he communicated to me many of his views, and I share his views. They are all very valuable. So some of the comments that I make here are also shared by Dr Wang. I have heard comments that the Government by selling POSBank has given up its role in promoting the habit of saving amongst Singaporeans. I do not agree with that as the promotion of the saving habit is already deeply enshrined in our CPF policy. To promote saving in the form of a savings account is a task that now rests on the shoulders of the private sector. In its public statements, Mr Dhanabalan, the Chairman of DBS, has said that POSBank will continue in this role by providing basic banking services at affordable charges. Indeed, for children, students and full-time national servicemen, these services will be free. Moreover, I would like to point out that the idea of privatising an organisation like POSBank is not new. There is a global trend, as more and more governments find it more efficient to focus on the business of the government while privatising other functions such as running their national savings bank.

In the early 1980s, the idea of corporatising POSBank was actively evaluated. It received strong support from the management and staff of the bank. I believe this idea was scuttled when it met strong opposition from the local commercial banks who felt that a corporatised POSBank would provide unfair competition.

Most Singaporeans, on first hearing of the acquisition of POSBank by DBS, lamented the demise of POSBank. Paradoxically, this is also the strongest endorsement of the Bank. POSBank has been relentless in its pursuit to provide outstanding and convenient service to all its customers, including the small depositors. From a discussion with Dr Wang, I learned that a third of POSBank's customers, including children, students and foreign workers, have deposits of $100 or less. In fact, over 90% of POSBank's deposit base is contributed by only 20% of the customers. Therefore, POSBank's accounts are being subsidised. Moreover, the cost of servicing these accounts has been escalating all these years, as costs of ATMs, staff and premises have gone up relentlessly. POSBank could not have gone on subsidizing such a large proportion of its depositors. The House might be interested to know that the Bank had been considering for some time the recovery of a portion of these costs from its customers. Some measures have already been taken, for example, GIRO charges on service providers and charge for coin exchange. More were being contemplated. As I have indicated earlier, whether POSBank is merged or not, the days of free services from POSBank were numbered.

While the POSBank has been outstanding in providing service, it has not been able to match the commercial banks in providing its depositors with a better rate of return. This is so because the investment avenues open to POSBank were severely limited by the Ministry of Finance which is not surprising, because the deposits are guaranteed by the Government.

To protect customers' funds, the investments had to be safe and these usually yielded lower returns. The interest earned by POSBank's customers is tax-free. To level the playing field, POSBank penalised its bigger customers by giving a lower interest rate for deposits in excess of $100,000. This is counter intuitive if the goal is to attract more customers with bigger deposits. This principle was laid down by the Ministry of Finance in 1978 and remained unchanged for nearly 20 years. Meanwhile, the environment has changed. Tax rates for individuals have come down. Taxes have gone up. What was considered a lot of money in the past is no longer that much today. Singaporeans have become more sophisticated in their banking needs. There are also more investment options open to them. Therefore, POSBank's two-tier interest rate structure was reversed in the earlier part of this year, the better reward, the bigger depositors. Not responding to changes would have been suicidal in today's most competitive environment.

As a statutory board, POSBank has been constrained in its response to changes. The growing financial sophistication of Singaporeans and POSBank's limited product range has already reduced its market share of deposits. If this trend continues, the Bank's relevance in the lives of Singaporeans will diminish over time.

One of the major complaints from Singaporeans regarding the acquisition of POSBank is the prospect of paying higher mortgage rates for their Credit POSB's housing loans. The merger agreement stipulated a time-table for the mortgage rates to move progressively towards the market levels.

I spoke to Dr Wang who told me that the difference between the rate of Credit POSB and that of DBS today is between 1.25% and 1.5%. As the loan base of Credit POSB is about $7.6 billion, this could potentially mean an additional revenue in the region of between $95 million and $114 million per year for DBS if the rates were completely equalised. I mention Dr Wang here because he had to go to Hong Kong with DPM. Therefore, he is not in this House. So some of the points I have mentioned here were also his.

Sir, those who have borrowed from Credit POSB, including Dr Wang himself, will feel the pinch of the higher mortgage rates. However, we should consider this fact. Most of the depositors of POSBank live in HDB flats. They obtain their housing loans from HDB. All the borrowers of Credit POSB are owners of private properties, like condominiums and landed-properties. Mr Fong Yong Kian, Press Secretary to the Minister for Finance, gave the following figures in the Straits Times Forum Page reply of 20th August 1998:

"The average Credit POSB loan is $460,000. Out of the 10,900 granted in the last two years, 1,650 loans exceeded $750,000 or 650 exceeded $1 million."

I agree with Mr Fong that there is no justification for the Government to provide these borrowers mortgage loans at below market rates. I think it is hard to argue the merit of maintaining the lower than market interest rates of Credit POSB which benefit private property owners and give a higher yield for their depositors who are largely HDB residents. There is an argument that lower mortgage rates help Singaporeans to own homes. But we must bear in mind that these Singaporeans are already in the higher income bracket.

Sir, I share Dr Toh See Kiat's concern. Because POSBank is a statutory board it could place national interest ahead of commercial considerations in many of its operational decisions. For instance, it has always taken the lead to bring innovations and introduce IT to banking in Singapore. POSBank was the first local bank to computerise its savings accounts records, thereby paving the way for on-line banking. POSBank introduced GIRO to Singapore in 1974, and direct salary crediting as early as 1972. POSBank pioneered the concept of the self-service banking, being the first local bank to introduce the ATM in 1979, a passbook updating facility in 1993, and a cheque book dispenser in 1995. Even now, POSBank is piloting a three-in-one ATM which allows cash deposits and passbook updating in addition to cash withdrawals, all in one machine. In this way, POSBank is a prime mover of new banking innovations and performs national service. I am concerned that in future no banking institution will be playing this catalyst role. This is important. Unless we keep on harnessing technology to innovate and improve our productivity, we run the real danger of losing our competitiveness and not achieving our objective of becoming the premier financial centre in this part of the world.

Sir, I would like to conclude by extending my deepest appreciation to the POSBank staff, past and present, who have built up the Bank from its humble beginnings to the pre-eminent position it enjoys today. We were all once POSBank's savers. I am concerned that this sterling service will not always be remembered by all Singaporeans they have served all these years.

Dr Tan Boon Wan (Ang Mo Kio): Mr Speaker, globalisation is here to stay. The present crisis is only a correction to its unrelenting growth. Current oppositions to its progress are just aberrations. They will be smoothened out in due course. The process will roll along after this interruption. Hence, our policies are sound and we should stay the course.

Singapore will in the future be merged more closely with the world financial system. Foreign banks and financial institutions will make their way here. Our banks and institutions must in turn venture abroad. The competition, both at home and abroad, will become more intense. Size will be a factor in the competition. For a population of just under four million, the number of local banks and financial institutions is too many. They are also small in comparison to those who come in from overseas. I therefore support the merger of DBS and POSBank, and hence the Bill standing before the House. However, it is important to note that this merger came about not because the POSBank is no longer viable. It is to prepare for the coming competition. POSBank is a relevant and useful institution to Singaporeans. It is thus important that the merger does not result in the disappearance of unique functions and activities that it provides to the people in Singapore.

Let me now re-emphasise a few of them which several of my hon. colleagues in the House have already spoken on. POSBank is recognised as the bank of the ordinary people. Anyone, rich or poor, young or old, can open an account. You do not have to have a lot of money in the account. This is not how other banks operate. In recent years, many banks have openly discriminated against the less wealthy. If you do not maintain a minimum monthly average of typically a thousand dollars, a service charge will be levied. Their justification is that it is not profitable to provide such accounts. It is well-known that Singaporeans are a people who save their money. The POSBank, I believe, has much to do with Singaporeans having this good saving habit. No matter how much you have, you can squirrel them into your POSBank account. To make it easy for the people, POSBank branches sprout out all over the island. Over time, the amounts in these small accounts built up. Campaigns were developed at the young and adult population. I believe that profit is not the driving force underlying the operations of POSBank. Will this national effort go the way of the dodos if the profit motivation of banks takes precedence? Society will rue the day when this happens. Unfortunately, this harmful effect will only be seen in the long term.

I can see another useful role the POSBank has played. Besides giving voice to the ordinary Singaporeans, it has also spurred the services the bank provides to the people. By providing a reasonable alternative to the commercial banks, this must have put a cap to the charges that they have imposed on their services. Due to the high quality of services the POSBank has provided, this must have spurred the other banks to also up their services. What will replace this benchmark with the merger? I would urge DBS to identify these unique functions and services of POSBank. These are strengths of POSBank. Those that are needed by the ordinary people and are deserving of preserving should be preserved.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, I thank all the Members who have spoken in support of the Bill, especially Dr Tan Cheng Bock who, in fact, answered half the questions I intend to answer. I particularly join him in thanking the POSBank's staff for their sterling service over the years.

The one feature which has been commonly raised by all Members here who have spoken today is the seeming loss of an icon, and there is some suggestion that somehow after the merger, POSB just fades away. I can assure Members that is not the case. The merger or the combination of these two banks achieves a very important objective. It is Government's policy to encourage the growth of strong Singapore banks, and this particular combination is a beginning, so that we have a Singapore bank which can compete effectively in the region and in the world.

POSBank was chosen to be married to DBS because they have complementary strengths. POSBank has a very large retail network and extensive coverage. Therefore, it is an excellent retail bank serving a whole spectrum of small and large customers. On the other hand, DBS is a very strong commercial bank with strong corporate accounts. So the merger and the fit is excellent. And I can assure the House that it is not the intention of DBS - I hope they remember this - to make POSBank disappear. Instead, it will build on its strength to retain all the good features of POSBank in order to add to its attractiveness as a combined bank. Certainly the network, the ATMs, will be maintained and DBS has assured us that it will continue to provide services for the small depositors and indeed children up to 12 years, students up to 21 years and full-time National Servicemen will all continue to be able to have a POSBank account without a service charge. In addition, it is also undertaking to retain all POSBank staff on current conditions and there would be no redundancies. Of course, they cannot guarantee this over the long term, because conditions change. But there is no intention of letting anybody become redundant.

I share his sentiments about the loss of an icon. It is indeed an institution which is so well known that you see it everywhere. But it is just the thought of an icon lost, because many features of the icon will remain, including the logo and the quality of service which POSBank has built up. Another question asked by Members was why Government selected DBS as the marriage partner instead of getting the best value by tendering the POSBank to all. The reason is that this particular merger did not start off with a purely commercial intent. We were not out to maximise the profits to the Government. The objective, as I have explained earlier, was to build on Government's wish to develop a strong bank in Singapore, and at the same time we wanted to ensure that the range of POSBank's services would be maintained as far as possible. Of course, over time, some things will have to change but, by and large, the best features will be maintained for as long as feasible.

The combined bank, headed by DBS, will ensure that POSBank's social functions are retained, and this includes the provision of affordable banking services to small depositors. DBS has also agreed to phase down the mortgage rates currently extended to Credit POSB's borrowers over an extended period of time. The tax exemption features of POSBank will also be phased out over six years. These concessions will allow DBS to commit to the maintenance of POSBank's social function as part of the purchase and sales agreement.

Some concern has been expressed as to why the tax exemption period should not be extended. I think six years is more than adequate - three years of tax exemption for all POSBank deposits followed by another three years of tax exemption for the first $100,000 of deposits. It is only by the year 2005 that all tax exemption is entirely removed. We cannot allow, of course, the combined bank to enjoy tax exemption indefinitely because it would be unfair to the other commercial banks.

On the question of Credit POSB's mortgage interest rates which are now between 1.5% and 1.75% lower than commercial bank rates, we have said that Government's policy is not to subsidise purchasers of private property. Government subsidies for housing are extended through the HDB housing programme and this is unaffected by the changes in Credit POSB's mortgage interest rates. Dr Tan Cheng Bock has already quoted some published figures which show that the great bulk of the borrowings through Credit POSB is by people buying condominiums and private properties in the range of $460,000, going as high as $1 million. Persons with loans of this size are clearly not from the low-income groups and it is not Government's policy to continue to subsidise such loans indefinitely. The reason why they are currently enjoying lower interest rates is because of the special circumstances of POSBank in which restrictions on its investment opportunities have driven them to gain market share in the housing loan market by offering lower mortgage interest loans through Credit POSB.

A phase-down period of four years is considered to be reasonable. The request for the phase-down to be extended from four years to six years, in case the downturn should go beyond the four-year period, would not be fair in that the four-year phase-down was agreed by DBS at the time the sales agreement was signed in July. Changing the terms now would impose an unfair new burden on POSBank.

Furthermore, if the economic situation in Singapore should remain bad or even deteriorate after the four-year grace period, we would all indeed be in very serious trouble, in which case it is not just the Credit POSB's borrowers which Government needs to help but the entire Singapore population. So I think we will face that problem when we see it. I do not believe, therefore, we should vary the terms.

I will now deal more specifically with the individual questions raised by Members, although some of these have already been covered by what I have said.

Mr Leong Horn Kee wants to know whether the removal of Government's guarantee would mean that the new entity would be as safe as POSBank. Obviously, it cannot be as safe as a 100% Government guarantee. But, in practice, I should point out that no commercial bank has ever received a Government guarantee nor does it need to do so in Singapore. Singapore maintains a very tight supervisory oversight on its commercial banks and banks are encouraged to be very careful on their investments and ensure that the security of their depositors' funds is always adequately looked after. There is no reason for savers in the new bank to have concern over the potential for losses to their accounts.

However, one issue which has not been raised, but I will mention here, is that the MAS is studying the possibility of introducing a limited form of deposit insurance for banks in Singapore to provide an added measure of protection for small depositors. This would be in the context of Government's intention to open up the domestic banking sector gradually to more foreign competition. The issue is a complicated one and we would not want to rush into it. But it is certainly an option we can consider.

I believe that Mr Chiam has misunderstood the tax exemption scheme. The phase-out of tax exemption over six years applies to all depositors, not just to persons below 21 and national servicemen. However, post merger, children, students under 21 and full-time national servicemen are the three categories of customers who will continue to be allowed to open savings accounts without a service charge.

Mr Chiam also asked why POSBank was not sold by tender. I have explained earlier that the sale was not treated as a purely commercial transaction. In a sale by tender, POSBank would be sold to any bank which offered the highest price. This was not Government's intention. We wanted to select a bank which could best meet and implement our objectives. As Government had a controlling interest in DBS, there was assurance that DBS, as the acquiring bank, would be best placed to continue to maintain POSBank's social obligations. Once DBS was selected as the potential partner, negotiations for the sale and purchase price was conducted along commercial lines.

Mr Rai recommends that after the merger, DBS should emulate POSBank in providing a high quality of service to its customers. I can assure him that the intention is not to degrade the quality of service. Instead, POSBank's quality image will be preserved, together with its coverage network. I think I have answered the question raised by Dr Vasoo. I have also answered most of Mr Chew Heng Ching's questions, including the question raised by Mr Iswaran.

I hope Dr Toh See Kiat is satisfied with the answers I have given so far. Because a lot of what he said was also covered by the other Members.

I do not think I really need to respond to Dr Tan Cheng Bock. He has helped me to answer most of the questions.

Mr Low Thia Khiang: Mr Speaker, may I seek clarification from the Minister? What is the view of the Minister on POSBank signing the merger agreement with DBS before the House passes the Bill today and whether the Elected President was consulted on this merger?

Dr Richard Hu Tsu Tau: I will answer this when we come to the next Bill.

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 Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clauses1 to 6 inclusive ordered to stand part of the Bill.

Clause 7 -

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 13, after line 16, to insert -

"(7) The Bank and the persons to whom section 47(3) of the Banking Act (Cap.19) applies may disclose information regarding the particulars of any account transferred to the Bank and the affairs of the customers of that account which the bank normally obtains permission from its own customers to disclose in accordance with its practice as at the transfer date and, in particular, the Bank and such persons may disclose information relating to any such accounts or affairs -

(a) where the account relates to a staff loan granted to the customer under his employer's staff loan scheme administered or funded by POSB, Credit POSB or the Bank, to that employer of the customer for the purposes relating to that loan and any security therefor; and

(b) where the account relates to a loan secured by any property or other asset, to the insurer or proposed insurer of that property or other asset for the purposes relating to the insurance of that property or asset, and the customer shall be deemed to have given his written permission for all such disclosures.".

The reason for the amendment to clause 7 is to allow DBS to disclose information to POSBank and Credit POSB accounts after the transfer provided that this is for information that DBS will normally be allowed to disclose to its own customers.

In particular, the amendment will also allow DBS to disclose information to employers for staff loan purposes and insurers for insurance policies. The amendment will treat the customer or transferee account as having given it permission for such disclosures.

Amendment agreed to.

Clause 7, as amended, ordered to stand part of the Bill.

Clauses 8 to 19 inclusive ordered to stand part of the Bill.

The Schedule ordered to stand part of the Bill..

Bill reported with an amendment, read a Third time and passed.