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BANK Negara is moving ahead with the times by replacing the outdated base lending rate (BLR) with a more relevant interest rate benchmark. Bank Negara Malaysia will replace the Base Lending Rate with the Base Rate from Jan 2, 2015 as the main reference rate for new retail floating rates. While banks in Malaysia are moving away from the base lending rate (BLR) system from January next year, customers with existing loans or applying for new ones won’t be affected. Once the new reference rate is implemented, both new and existing borrowers can expect to easily compare a more transparent pricing mechanism between financial institutions for better informed decision-making. In this transparent scenario, banks will have to add more value to loan packages to attract customers, with the latter benefiting the most.
This was confirmed by a Bank Negara Malaysia (BNM) representative today, who explained that the change is to perception on how the bank interest is charged. For example, while many banks today may tout mortgage offers to be at “BLR-2%”, this will later change to the new base rate plus the margin set by the bank.
To illustrate, if the BLR is now at 6%, the “BLR-2%” offer means the customer pays 4% on the mortgage. With the new system, the bank will have to reveal its base rate – say 3% – and also disclose that its margin is 1%. Ultimately, while the new interest is presented as “base rate + 1%”, the effective rate paid charged on the customer’s mortgage remains the same at 4%. The major difference is that this new rate will be determined by different factors, which includes banks’ cost of funds, their Statutory Reserve Requirement (SRR) account balances (how much they have in their reserve accounts with BNM proportionate to their eligible liabilities), borrower credit risk, liquidity risk premium and operating costs and profit margin.
Better transparency always spells good news for consumers. It is also good for the banks as it creates healthy competition and provides wider options for loan applicants. Bigger establishments will have more room to maneuver when determining the reference rates, whereas smaller institutions may not have as much leeway to offer attractive rates. This is due to the usually lower cost of funding for bigger institutions via current and savings accounts (CASA) and Fixed Deposit accounts.
The new reference rate framework proposed by Bank Negara to replace the base lending rate (BLR) will spur stiff competition in the banking industry, AmBank Group chairman Tan Sri Azman Hashim said.
“Competition will get stiffer, as customers will be exposed to more transparent pricing,” he told a media briefing after handing over a multi-purpose vehicle to the Malaysian Islamic Women’s Welfare Council as the diversified banking group’s contribution.
The new interest rate framework allows banks to vary the floating lending rates in tune with fluctuations in funding costs, reflects changes in monetary policy and acts as the basis for the pricing of retail loans, according to Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz. She also said that the average lending rate applied by banks currently did not reflect funding costs and was substantially lower than the BLR.
“It reflects other costs, overhead costs and others. So the new framework will be more related to the funding cost, especially the marginal funding cost, which is actually how banks are pricing their loans,” she said.
For loans prior to 2015, the BLR will still be the reference point but should financial institutions make any change to the Base Rate; the same will be made to the BLR to reflect this. BNM states that the shift to the new Reference Rate should have no impact on the effective landing rates charged to retail borrowers which are determined by various factors and that this does not represent a change in the Bank's monetary policy stance.
Amidst the uncertainties on the rates, home buyers should always be a step ahead by comparing all the rates from banks before making a decision on which loan to apply for. For those who fear higher rates after the implementation of the new rate, you can safe guard your low rates now by switching or getting a fixed rate loan. Doing so can also remove some of the intimidation factor from the home buying process.