BLR will be replaced by BR on January 2nd, 2015

Base Lending Rate (BLR) will be replaced by Base Rate (BR)

BLR will be replaced by BR on January 2nd, 2015

Bank Negara officially announces: BLR will be replaced by BR on January 2nd, 2015.

The long expected confirmation has been given on March 19th by Bank Negara: 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. Bye bye so much loved BLR minus (for mortgage on residential only) and somehow welcome the BR or Base Rate, please enter smoothly in the Malaysian Property Market that, during the last few month, has been shacked and bitten every other day with a totally new set of rules and regulations.

On January 16th, 2014 Bank Negara issued a consultative paper to all banks on a new reference rate framework to replace the BLR or Base Lending Rate asking to reply before end of February with comments and proposals. For sure it was about time for this to happen as the current framework which allows banks to release different mortgage offers based on projects, type of properties, financial stability of the borrower and so on is not sufficiently transparent for the consumers.

It will be interesting to see within the next 10 months how banks will react to this new guideline and how they will be able to remain competitive in much more transparent market, definitely the consumers should be profiting from the new BR framework which will allow them to better understand the borrowing/ lending mechanism and allow a much more rational decision on the final choice.

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.

Source : Bank Negara Malaysia

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