THOSE earning $20,000 to $30,000 a year may find it difficult to borrow from licensed moneylenders after new rules kick in today.

 

Under the changes, an effective interest-rate cap of 20 per cent a year will apply to loans for those who earn less than $30,000 annually.

 

Previously, the cap applied only to those who earned less than $20,000 a year.

 

As borrowers who earn above the $30,000 bracket may take bank loans, those whose income was between $20,000 and $30,000 a year had become the main customer base for moneylenders.

 

Moneylenders said they will now focus on those who earn more than $30,000 a year.

 

Moneylenders' Association of Singapore president David Poh said that with the new interest cap for those earning $20,000 to $30,000 a year, moneylenders will find it unattractive to lend to them.

 

'The calculation is very simple. If a person borrows $5,000, for example, and we charge an effective interest rate of 18 per cent, we will collect only $75 a month in interest. That's bad business because the risk of default is high.'

 

Moneylender J. Tan said that around a third of borrowers default on their debts. He has been turning away borrowers from the $20,000 to $30,000 bracket since April because he is afraid they may be unable to settle their loans. 'Even those with good credit histories, we tell them, 'Sorry, it's not that we don't want to help but the risk is too high.''

 

For those who make over $30,000 a year, Mr Tan said he may have to charge a monthly interest rate of 30 per cent - up from 15 per cent - to cover lost margins from the lower-income group and the risk. 'They are the ones who have probably used up their bank credit facilities so I have to be careful.'

 

Another moneylender, Mr Jeffrey Tan, said he will not reject loans to borrowers from the $20,000 to $30,000 group outright, but will consider them on a case-by-case basis. 'We will see what the customer is like, what kind of job he is doing, and why he is taking the loan. We will be very stringent.'

 

Mr Kuo How Nam, president of Credit Counselling Singapore, warned that some borrowers may be driven to a corner. 'There will be more people unable to get credit and they may resort to borrowing from loan sharks,' he said.

 

Besides the extension of the interest-rate cap, the new rules also require moneylenders to use effective interest rates instead of nominal rates. This means borrowers will know exactly how much interest they will pay a year.

 

Lenders are also not allowed to charge certain fees, including payment for accepting a loan application, and exceptions that allow borrowers to take on larger unsecured loans have been abolished.

 

Last November, new restrictions on advertising by moneylenders were introduced. With tighter regulation, the number of registered moneylenders has fallen slightly over the past year, from 269 to 233.

 

The Law Ministry yesterday said it will recalibrate the regulatory framework where necessary, in consultation with relevant industry stakeholders.