Adequacy of Prevailing Total Debt Servicing Ratio in Minimising Systemic Risk to Financial Institutions and Borrowers
Prime Minister's OfficeSpeakers
Summary
This question concerns the adequacy of the Total Debt Servicing Ratio (TDSR) in minimizing systemic risks for financial institutions and borrowers amidst rising interest rates and inflation. Mr Gan Thiam Poh questioned the current framework, to which Senior Minister Tharman Shanmugaratnam responded that the TDSR includes an interest rate buffer of at least 3.5% to encourage prudent borrowing. He noted that the median TDSR for new loans is healthy at 43% and the mortgage delinquency rate remains below 1%. Senior Minister Tharman Shanmugaratnam highlighted that the Monetary Authority of Singapore subjects major banks to rigorous stress testing to identify and manage portfolio vulnerabilities. He urged households to exercise caution with new debts and ensure their ability to service loans in anticipation of further interest rate hikes.
Transcript
48 Mr Gan Thiam Poh asked the Prime Minister in view of rising interest rates and the current inflationary environment, whether the prevailing total debt servicing ratio is sufficient to prevent and minimise systemic risk to both financial institutions and borrowers.
Mr Tharman Shanmugaratnam (for the Prime Minister): The total debt servicing ratio (TDSR) is part of a suite of measures MAS has put in place over the years to encourage prudent borrowing and lending on residential property purchases. The maximum TDSR was lowered to 55% on 16 December 2021.
A key feature of TDSR is that it builds in a buffer against rising interest rates, such as what is occurring now. To calculate mortgage obligations, TDSR is computed using an interest rate which is the higher of 3.5% or the prevailing market rate to calculate mortgage obligations.
The household debt situation in Singapore remains healthy, with the median TDSR at 43% among new loans issued over the past year, compared to the regulatory limit of 55%. As of the first quarter of 2022, the median loan to value ratio for the outstanding stock of mortgages is less than 50%, which means that, in most cases, property prices would have to fall significantly for lenders to realise losses. The credit profile of mortgages is also healthy, with the proportion of delinquent mortgages at less than 1%.
MAS has robust regulatory and supervisory frameworks to minimise systemic risks to financial institutions (FIs). For instance, MAS subjects all major banks to rigorous stress testing to assess any vulnerabilities in their portfolios.
MAS urges households to exercise caution in their new borrowings. They should plan for further interest rate increases and be sure of their ability to service their loans before making additional long-term financial commitments.