Bank Negara Malaysia had recently announced the release of the revised Reference Rate Framework. The Framework will be effective 1st August 2022. Under the revised framework, the Standardised Base Rate will replace the Base Rate (BR) as the reference rate for new retail floating-rate loans.
Why the Change?
Reference rates are publicly accessible interest rates that are used by financial institutions as a footing for pricing loans. The Reference Rate Framework was first introduced in 2015, which established the Base Rate (BR) as the reference rate for retail floating-rate loans in Malaysia.
Financial institutions utilise this framework to use different methods to set their respective BR, which has made it more difficult for consumers to compare the retail loan products offered by each financial institution and understand the reasons behind changes in their loan repayments.
Moreover, the different BR procedures across financial institutions have resulted in a more uneven transmission of monetary policy.
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What Impact Will It Have?
Under the revised Reference Rate Framework, the Standardised Base Rate will be used as the common reference rate for all financial institutions for their new retail floating-rate loans, making it easier for consumers.
The Standardised Base Rate will be linked solely to the Overnight Policy Rate (OPR). Changes to the Standardised Base Rate will therefore only occur following changes in the OPR, which is determined by the Monetary Policy Committee of Bank Negara Malaysia:
- Borrower’s Credit Risk
- Liquidity Risk Premium
- Operating Costs
Profit margin and other costs will continue to be reflected in the spread above the Standardised Base Rate. The OPR as the Standardised Base Rate improves comparability and is more transparent to consumers.
To quote Governor Datuk Nor Shamsiah, “Consumers would find it easier to understand changes in their loan repayments as the OPR will be the only driver of the Standardised Base Rate. The Standardised Base Rate will also facilitate effective monetary policy transmission as complete adjustments to retail loan repayments will take effect following a change in the OPR.”
Here are some of the key highlights of the Revised Reference Rate Framework.
When Will It Be Implemented?
The Standardised Base Rate will be the reference rate for the pricing of new retail floating-rate loans and the refinancing of existing loans from 1 August 2022 onwards. The one-year transition period will provide enough time for financial institutions to undertake the necessary preparations and system enhancements to ensure a smooth implementation of the revised framework.
The shift towards the Standardised Base Rate will have no impact on the effective lending rates of existing retail loans, which will continue to be used under the BR and Base Lending Rate (BLR). After the initiation date, the BR and BLR will move precisely with the Standardised Base Rate. Any differences will be reflected in the comparing changes in accordance with the base rate and base lending rate.
Subsequently, financial institutions will keep on showing their base rate and base landing rate, alongside the Standardised Base Rate, at all branches and sites after the commencement date for the convenience of customers.
New retail borrowers will be largely unaffected by this revision, as effective lending rates for new borrowers would continue to be competitively defined and regulated by varied factors such as:
- A financial institution’s assessment of a borrower’s credit standing
- Funding conditions
- Business strategies.
Finally, the shift following the revision in the Reference Rate Framework does not represent a change in the monetary policy stance of the Monetary Policy Committee of Bank Negara Malaysia.
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