On 31 March 2020, the Monetary Authority of Singapore (MAS) announced a package of targeted relief measures that was rolled out together with the Association of Banks in Singapore, the Life Insurance Association, the General Insurance Association and the Finance Houses Association of Singapore to provide temporary relief for individuals and small- and medium-sized enterprises (SMEs) facing liquidity problems during the COVID-19 pandemic. In this collapsing world economy, these measures could be a lifeline to stave off bankruptcy and winding-up actions.
The package has three components: one for individual borrowers to help them meet loan and insurance commitments; the second supports SMEs with continued access to bank credit and insurance coverage; the third ensures well-functioning and liquid interbank funding markets.[1] This article focuses on the relief measures involving loan commitments.
Individuals with Residential Property Loans
Individual home owners who are temporarily cash-strapped during this period may opt to defer either the principal payment or both the principal and interest payments of their residential property loans until 31 December 2020. The relief is not automatic, however, and borrowers will have to apply to their respective lenders for deferment of repayments. To qualify for the deferment, borrowers need not show any adverse impact from COVID-19. Lenders will approve the request for deferment as long as the individual is not in arrears for more than 90 days as of 6 April 2020.
Individuals should carefully assess their financial positions before opting for loan deferral relief, because they may end up paying more. Deferring the principal payment does not stop the interest from accruing. Interest will continue to accrue, albeit only on the deferred principal amount; there is no compounding of interest in that no interest will be charged on the deferred interest payments. It would be prudent for individual borrowers, when applying for deferment, to explore and seek the assurance from their respective lenders as far as possible that (i) their personal credit rating will not be adversely impacted by such deferment; (ii) all other attendant fees and charges (including late payment charges) that the lenders would otherwise be entitled to impose would be waived for the corresponding period of deferment; and (iii) the applicable interest rates on the loans will remain unchanged and even extended for the duration corresponding to the principal deferment period.
Individuals with Unsecured Credit Facilities
Interest rates typically charged on credit cards can be as high as 26 percent. Naturally, outstanding balances on credit cards should be managed wisely. However, for individuals who have had to resort to unsecured credit facilities from banks or other credit card issuers to tide things over, there is the option to convert such outstanding balances to term loans at a much-reduced interest rate capped at 8 percent. Depending on the individual’s financial circumstances to meet the minimum monthly repayments, the repayment period for such a term loan is up to five years.
This relief measure is targeted at individuals who have suffered a loss of 25 percent or more of their monthly income after 1 February 2020 and are at risk of incurring substantial debts. Such individuals may apply to their lenders from 6 April to 31 December 2020 to convert their outstanding unsecured debt.
SMEs with Secured Term Loans
Similar to individuals, SMEs in financial difficulty with secured term loans may opt to defer principal payments until 31 December 2020. SMEs may also extend their secured term loans by up to the corresponding period of deferment of principal repayments. However, in order to qualify for such relief, the SMEs must meet the following criteria:
- They must continue to make interest payments on the loans;
- They must not be more than 90 days behind in payment as of 6 April 2020 and be in good standing with their lenders.
- The assets securing the loans must meet lender approval.
Affected SMEs looking for other targeted and direct financial relief may also approach banks and finance companies that remain committed to working with them on adjusting loan repayment schedules for other types of loan facilities besides secured term loans.
Temporary Relief under COVID-19 (Temporary Measures) Act 2020 (“the Act”)
Where one party to a scheduled contract is unable to perform or meet an obligation in the contract due to a COVID-19 event, the other party to the contract may not take any enforcement action against the first party in relation to such inability for the prescribed period of six months commencing on 20 April 2020.[2] In effect, the enforcement of such contractual obligations is suspended for six months. To take this relief, the first party must serve a prescribed notification for relief to the other party/parties to the contract, any guarantor of the obligation and any such other person as prescribed. The other party may challenge such notification by applying for the appointment of an assessor to determine whether the case is one that merits relief under the Act.
To qualify for relief, an obligation must first and foremost be contained in a scheduled contract. A scheduled contract under the Act as it relates to secured loans refers in particular to:[3]
(a) a contract for the grant of a loan facility by a bank licensed under the Banking Act (Cap. 19) or a finance company licensed under the Finance Companies Act (Cap. 108) to an enterprise, where such facility is secured, wholly or partially, against any commercial or industrial immovable property located in Singapore;
(b) a contract for the grant of a loan facility by a bank licensed under the Banking Act or a finance company licensed under the Finance Companies Act to an enterprise —
i) where such facility is secured, wholly or partially, against any plant, machinery or fixed asset located in Singapore; and
ii) where such plant, machinery or fixed asset (as the case may be) is used for manufacturing, production or other business purposes.
The six-month prohibition from taking any prescribed enforcement action for such class of scheduled contracts is restricted to secured loans made to an enterprise as defined in the Act and is further limited to selected security over commercial or industrial immovable property locally situated in Singapore as described in sub-paragraph (a) or plant, machinery or fixed asset locally situated mentioned in sub-paragraph (b), or the part of the obligation that is secured by such security.[4]
To qualify as an enterprise under the Act, an SME must be:[5]
a body corporate or unincorporate that is incorporated, formed or established, and carries on business, in Singapore, where —
a) not less than 30 percent of its shares or other ownership interest is held by citizens of Singapore or permanent residents of Singapore or both; and
b) the turnover of the group (within the meaning of the Accounting Standards applicable to it) to which it belongs does not exceed $100 million in the latest financial year.
Prohibited actions in relation to such security include commencement or continuation of an action in a court against the first party (most likely to be the borrower) or his guarantor or surety, enforcement of any security over any immovable property, enforcement of any security over any plant and machinery used for the purpose of a trade, business or profession, and insolvency and winding-up proceedings. Other than the suspension of enforcement, the contractual rights of banks and finance companies―in particular to charge fees and interest for nonpayment or late payment of loan obligations due and the right of set-off―are not affected. Negotiation with banks and finance companies for deferment of payment of the principal amount of the loan will not be complete unless it includes a waiver of late charges and penalty interest so as to contain the escalation of the overall loan amount. The credit rating of the SME/enterprise must also be safeguarded for the future.
An SME that does not qualify as an enterprise under the Act will not be afforded temporary relief and protection under the Act for its loan agreement. Unsecured loans and loans secured by assets other than those selectively mentioned in the Act do not qualify as scheduled contracts and are not protected by the Act. A contractual obligation that was to have been performed before 1 February 2020 is also beyond the scope of the Act.
The Act’s other major benefit for individuals and businesses helps protect them from bankruptcy and insolvency by significantly increasing in the monetary thresholds for bankruptcy and insolvency and lengthening of the time period for borrowers to satisfy a statutory demand.
Given the severity of the spread of the COVID-19 pandemic and the devastating impact on the world economy, the initial prescribed period of six months may be a little too soon to hope for a recovery if a protracted global recession takes place.
We believe that the Singapore government will take the necessary measures to deal with worsening economic conditions and help Singaporeans financially as the crisis continues. Additional relief measures may be forthcoming. In any event, the prescribed period under the Act may be extended more than once, if necessary, subject to conditions.[6]
Notes
[1] Refer to MAS’s announcement for more information on the relief measures.
[2] COVID-19 (Temporary Measures) Act 2020, sections 3 and 5 read with the COVID-19 (Temporary Measures) (Prescribed Period) Order 2020 which came into operation on 20 April 2020.
[3] COVID-19 (Temporary Measures) Act 2020, The Schedule, para 1(a) & (b).
[4] COVID-19 (Temporary Measures) Act 2020, section 5(6) read with The Schedule, para 1(a) & (b).
[5] COVID-19 (Temporary Measures) Act 2020, The Schedule.
[6] COVID-19 (Temporary Measures) Act 2020, section 3(2) & (3).