Bank Negara Malaysia Annual Report 2013 Base rate to replace BLR in January next year

by **Cals** Thu 20 Mar 2014, 18:57

Bank Negara Malaysia Annual Report 2013 Base rate to replace BLR in January next year

Business & Markets 2014

Written by Sulhi Azman of theedgemalaysia.com

Thursday, 20 March 2014 10:33

KUALA LUMPUR: Bank Negara Malaysia (BNM) will implement the base rate on Jan 2 next year, replacing the currently used base lending rate (BLR).

BNM governor Tan Sri Dr Zeti Akhtar Aziz said the base rate is more transparent as it will enable consumers to make better and informed decisions on the many loan products offered by financial institutions.

Speaking at the launch of BNM’s annual report 2013 yesterday, Zeti said the base rate will be determined by financial institutions’ benchmark cost of funds and the statutory reserve requirement (SRR).

Other pricing components, 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 factors [in the] underlying changes to the base rate. The greater transparency in turn will enable more informed decision-making by consumers,” she added.

Zeti said financial institutions will be given the flexibility to determine their respective benchmark rates.

The base rate will be used for the new floating retail loans rate and the refinancing of existing loans extended from Jan 2 next year.

After the date, BLR-based loans prior to 2015 will continue to be referenced against the BLR. However, when a financial institution makes any adjustment to the base rate, a corresponding adjustment to the BLR will also be affected.

“As such, financial institutions will be required to display both their base rate and BLR at all branches and website,” Zeti said.

BNM said there is a strong link between the base rate, market interest rate and overnight policy rate (OPR).

These factors will facilitate more complete adjustments to retail loan repayments as the market interest rates are adjusted to changes in the OPR.

Zeti said the new reference rate framework is neutral on interest rates and does not represent any changes in monetary policy.

The BLR framework was introduced in 1983 and has served as the main reference rate for the floating retail loan rate.

With the development and transformation in the financial services sector, the central bank viewed that the BLR is no longer relevant.

In recent times, 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. The lack of transparency in the BLR makes it difficult for consumers to make informed decisions, the central bank said.

This article first appeared in The Edge Financial Daily, on March 20, 2014.