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Base Rate will replace the Base Lending Rate (BLR)

New Reference Rate


Framework








Bank Negara 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.

Posted on: 24th March 2014

Source: http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press_all&ac=2976&lang=en