SINGAPORE: The Monetary Authority of Singapore (MAS) has warned households and businesses their ability to repay loans may be impaired if economic conditions worsen or interest rates rise.
The central bank said the corporate sector is more in debt this year than last year and household debt is increasing faster than household assets.
In its annual Financial Stability Review report, the MAS notes that even while the loan growth has slowed at major banks in recent quarters, their lending to consumers and companies remained high.
After reaching a three-year high of 12.8 per cent increase year-on-year in third quarter 2011, overall loan growth turned negative in third quarter this year contracting dome 2.3 per cent.
The growth of so-called non-bank lending was close to 10 per cent in the third quarter of this year.
This has given rise to some concern that borrowers may bet that interest rates will remain low forever.
Song Seng Wun, economist at CIMB Research, said: "The concern at this point is really very much of the very low interest rate which encourages borrowing. If interest rate should turn in an environment where there is still uncertain outlook, it could impact the household and the corporate sector."
Growth in non-bank lending has been led by property-related loans, manufacturing and non-bank financial institutions.
The current Housing and Development Board's concessionary mortgage rate stands at 2.6 per cent per annum while banks offer around 1.2 per cent to 1.7 per cent per annum depending on the Singapore's three-month interbank offer rate.
The current three-month interbank offer rate is 0.85 per cent.
Alvin Liew, a senior economist at United Overseas Bank said: "The central bank is firing a warning to the banking sector that they need to be vigilant and they need to know that eventually interest rate needs to rise and they need to make contingency plans should such a thing (loan default) happens in the near future."
According to the MAS report, property-related loans account for 46 per cent of outstanding Singapore dollar loans to non-bank customers, is below the average of 48 per cent in the past eight years.
Demand for private residential property has remained resilient despite government measures to cool the market.
"Over the last two years progressively, (the measures) basically held the increases in check to a certain degree itself. Although prices are still rising, it is rising at a slower pace," said Song.
MAS views household debt levels as not alarming, as it notes that Singapore's household net wealth stood at four times of gross domestic product. This is 7.3 per cent better than a year ago.
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