Malaysia announces today that effective 2 Jan 2015, the Base Rate will
replace the Base Lending Rate (BLR) as the main reference rate for new
retail floating rate loans.
Since the introduction of the BLR framework in 1983, the BLR has served as
the main reference rate on retail floating rate loans in Malaysia. Since
then, the determination and implementation of the BLR has evolved with the
development of the financial sector. In the recent period, however, the BLR
has become less relevant as a reference rate for loan pricing, as lending
rates on new retail loans are being offered at substantial discounts to the
BLR. The BLR also lacks transparency, which makes it difficult for consumers
to make an informed decision.
The new Reference Rate Framework aims to provide a more transparent
reference rate to enable better decision by consumers in making choices
among the many loan products offered by financial institutions. The new
reference rate will also better reflect changes in cost arising from
monetary policy and market funding conditions, while encouraging greater
discipline and efficiency among financial institutions in the pricing of
retail financing products.
The Base Rate will be determined by the financial institutions’ benchmark
cost of funds and the Statutory Reserve Requirement (SRR). Other components
of loan pricing such as borrower credit risk, liquidity risk premium,
operating costs and profit margin will be reflected in a spread above the
Base Rate. This increases the visibility of the factors underlying changes
to the Base Rate. The greater transparency in turn will enable more informed
decision making by consumers. Under this cost-plus structure, spreads will
always be positive as it would not be possible for financial institutions to
offer lending rates below the reference rate. Financial institutions will be
given the flexibility to determine their respective benchmark rates. The
expected strong link between the Base Rate, market interest rates and the
Overnight Policy Rate (OPR) will facilitate more complete adjustments to
retail loan repayments when market interest rates adjust to an increase or
decrease in the OPR.
The Base Rate will be used for new retail floating rate loans and the
refinancing of existing loans extended from 2 January 2015 onwards. After
the effective date, BLR-based loans prior to 2015 will continue to be
referenced against the BLR. However, when a financial institution makes any
adjustments to the Base Rate, a corresponding adjustment to the BLR will
also be made. As such, financial institutions would be required to display
both their Base Rate and BLR at all branches and websites.
The shift to the new Reference Rate Framework should have no impact on the
effective lending rates charged to retail borrowers which are determined by
various factors, including a financial institution’s assessment of a
borrower’s credit standing, market funding rates and competitive
considerations. It is also important to note that the changes do not
represent a change in the Bank’s monetary policy stance.
Bank Negara Malaysia
19 March 2014
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