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Why CPF members are shortchanged by Singapore banks and the CPF Board: double-whammy

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  • Jeffrey Ho
    31 Oct 2006 I am writing in to alert CPF members about the ways Singapore s banks (especially the local banks whose Fixed Deposit rates are used by the CPF
    Message 1 of 1 , Oct 30, 2006
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      31 Oct 2006
       
      I am writing in to alert CPF members about the ways Singapore's banks (especially the local banks whose Fixed Deposit rates are used by the CPF Board to benchmark what rates to pay for CPF members' accounts) may have been artificially depressing their FD rates (official board rates), much to the detriment of millions of CPF members who are at the mercy of the CPF Board.
       
      This is prompted by the recent letters complaining about the numerous hikes in their housing loan interest rates this year alone (“First 'discounts', then, spiraling rates “ - Today, 5 Oct 2006) and the complaints about the banks’ lack of transparency with regards to the banks’ multiple Floating Board Rates or FBRs (“The rate debate: Banks defend FBR, but Case asks for more transparency” – Today, 25 Oct 2006.
       
      With the recent hikes in banks’ housing loan rates, a deeper review into the homeowners’ predicament reveals how they have been “systematically” shortchanged by both the banks (especially the local banks) and the CPF.
       
      Whether one is on the ‘credit’ side (the depositors without bank loans) or ‘debit’ (those with bank loans), or both, CPF members are being systematically marginalized and shortchanged.
       
      For the unfortunate homeowners now subject to rising interest rates, they have been repeatedly told that the rises were the result of market “Supply and Demand” as interbank rates (Singapore Inter Bank Offered Rate or SIBOR) – the rates at which banks charge one another when lending/borrowing between themselves – have been rising steadily over the last 2 years, from 0.7% to 3.5% p.a. now (“How to pick the right financing for your home” – Today, 20 Oct 2006). What is/are behind these rises? Integrated Resorts (IRs) requiring billions in financing? Financing of developers’ en-bloc purchases ($6 billion so far this year – “building up to a 2007 collapse?“ – Today, 6 Oct 2006)? Foreigners buying up high-end properties (more billions)? Fixed Deposit (FD) customers playing musical chairs switching from bank to bank offering better FD rates because these banks are not valuing loyal customers when they seek to pay rates of 3% only to new money from other banks, thus encouraging switching?
       
      However, banks readily admit that SIBOR is not the one and only reference rate being used as different banks have their own FBRs and even within the same bank, different rates are being used for different customers (like DBS’ ‘Mortgage Financing Rate’ for some and ‘Base Rate’ for others, depending on when one takes up the loan).
       
      As suggested by the letter writer in Today’s 5 Oct, “MAS must stop or regulate practice of multiple rates”, I question how Singapore’s central bank, the Monetary Authority of Singapore (MAS) could turn a blind eye and condone/allow such “opaqueness” as obviously, customers are being marginalized and taken full advantage of without full transparency on how these oligopolistic local banks charge their customers in the absence of a uniform reference rate like SIBOR for instance? Isn't this akin to how Singapore motorists are "confused by complex discounting" by oil companies, for which CASE's Mr Seah Seng Choon has expressed concern? (today's Straits Times, 31 Oct, "You need to be maths whizz to figure out petrol discounts").
       
      What’s worse is that loan rates are expected to rise in the coming months and years when demand for Singapore Dollars (S$) is expected to rise with the Integrated Resorts (IRs) coming on stream, more en-bloc purchases by developers and foreigners buying up more high-end properties expected.
       
      The irony is that while the housing loan rates (the “Demand” side of the equation) have been rising steadily the last year or so (at least 4 times this year to about 5.5% or so), CPF members’ deposit rates (the “Supply” side) have hardly moved. Granted, CPF members’ rate of 2.5% is better than the banks’ 0.74 average of savings rates and “official Board” FD rates for the Oct to Dec 2006 period, but the reality is that the banks are “manipulating” and “disguising” the true market demand for deposits by offering so-called “promotional” rates (ongoing for more than a year already? – reminds me of the “perpetual sale” tactics adopted by many companies) of as much as 3.1% p.a. for 3/6 month FDs without changing their official “Board” FD rates!
       
      However, these “Board” rates which the CPF Board benchmarks are “artificially” depressed, to the detriment of CPF members!! Why the MAS, Consumer’s Association of Singapore (CASE) and CPF Board have been silent on this is a great mystery (or is it?). Perhaps it’s not so much of a mystery as far as the CPF Board is concerned as such ‘silence’ and ‘both eyes closed’ mean they have to pay members less on their deposits, but morally, is it right when such savings are ‘compulsorily’ held at the Board whether members like it or not?
       
      Therefore, unless the CPF Board changes how it’s deposit rates are benchmarked, its current system of pegging its rate to the local banks’ artificially depressed savings and FD rates will continue to give the impression that the 2.5% is a much improved return on their savings when compared to the banks’ rates because such banks’ savings rates have been hovering below 1% since time immemorial and will remain so for more years to come with the way these local banks have been allowed to play such “perpetual promotional rates” games.
       
      CPF members have been deprived of better returns for far too long (for almost 20 years or so since the near-zero interest rate environment?), and with the rising housing loan rates, the government needs to review (and change the basis of benchmarking) the CPF deposit and bank housing rates to ensure members have sufficient funds for their retirement while making sure home ownership (which the government has been actively promoting) remains affordable. Furthermore, now that the CPF contributions to members’ accounts have been declining (with recent changes to reduce employers’ cost of doing business here), it is increasingly important for the government to ensure CPF returns on members funds are sufficient to compensate for the declining contributions.
       
      With the above in mind, I’d like to propose the following:
       
      1. Banks’ housing loan rates to be benchmarked to a uniform reference rate like SIBOR or the average of banks' "Board" and "Promotional" FD rates (better even if such promotional rates are done away with to reflect just one true rate) or the average of SIBOR and banks' FD rates or whatever rates that are transparent and reflect the "true market rate" (eg SIBOR plus x%) to ensure transparency in how banks charge their customers for housing loans (the “Housing Rate”);
      2. Correspondingly, CPF members’ deposit rates (on Ordinary Account) should also be pegged to the higher of 2.5% and SIBOR or the above “Housing Rate” (eg SIBOR/Housing Rate minus y%). This way, CPF members will not be as affected even if the  banks were to artificially depress the true market demand rate for deposits. (Note: The present anomaly in CPF members’ deposit and loan rates is due primarily to a combination of the lack of a uniform reference rate (hence banks take full advantage of this by coming up with various ways to circumvent or by being “opaque”) and the artificially depressed FD rates, to the detriment of CPF members.) The end result may well be CPF members possibly bearing the brunt of the loan interest increase in the market to finance the IR and/or developers’ purchase of en-bloc properties and/or foreigners’ purchase of high-end properties while not benefiting from the corresponding rise in deposit rates!
      3. A “For-CPF members-By-CPF members” scheme – MAS can help stabilize the Housing Rate by its “lender of last resort” role to finance the demand spikes of banks’ housing loan financing for citizens (at least for owner-occupied properties). This way, the Housing Rate will not be affected by the extra demands on S$ for other purposes like IRs, en-bloc purchases or foreigners’ property purchases.
      4. To provide CPF members the potential for better returns, allow them another option to have their money invested via the GIC or Temasek (Shin Corp investment notwithstanding) since both of them claim to have long term returns of 9% (over 25 years) and 18% (over 30 years) respectively. If this option had been available to CPF members, every $100,000 they had would have returned $862308.07 if compounded over 25 years at 9% pa (using the lower GIC’s returns) as compared to $185394.41 when the 2.5% return is used, a shortfall of $676,914 for every $100,000 of CPF members’ deposits!! This $676,914 would have made a world of difference for someone retiring at 62 who is expected to live for another 15 to 20 years. (Or one can use the common Rule of 72 which will give a good estimate of how such investments can double in half the time when the returns are doubled, or one-third the time when returns are tripled, etc..). Both GIC/Temasek and CPF members’ deposits share 2 very basic criteria and investment philosophy: maximizing returns and investing for the long term, so why deny CPF members this opportunity to obtain better returns? Granted, there are risks but isn’t allowing CPF members to do their own investing like they do now under the CPFIS scheme (without the benefit of the experience and expertise of GIC/Temasek’s fund managers) even more risky?
      Would the relevant authorities (MAS, Finance Ministry, CPF Board, etc..) take the above suggestions into consideration to give CPF members a fairer deal (on their housing loans and deposit interest) while possibly also giving the option for better returns on their savings with the CPF Board?
       
      At the same time, would CASE continue to champion on behalf of CPF members on the numerous complaints brought against the banks on their practices listed above, much to the detriment of CPF members?
       


       
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