PETALING JAYA: Effective Jan 2 next year, banks will replace the existing Base Lending Rate (BLR) framework with a new reference rate for loans to retailers.
The new reference rate, called the Base Rate, is touted to be more transparent and allows customers to easily identify financial institutions that are offering the best rates for loans.
According to Bank Negara, the new reference rate will comprise two elements, which are the Base Rate and the “cost plus”.
“Financial institutions would be given the flexibility to determine their respective benchmark rates,” said Bank Negara in a statement.
The Base Rate is determined by banks’ cost of funds and will differ marginally from one bank to another.
Typically, banks that are able to attract cheap long-term fixed deposits will be able to offer lower Base Rates as opposed to banks that depend on the more expensive inter-bank market for funding.
The “cost plus”, meanwhile, essentially comprises elements such as the financial institution’s over-heads and the credit risk profile of borrowers.
This effectively means that banks that are less efficient and incur high over-heads will not be able to offer competitive rates.
“Generally, the Base Rate should differ only marginally between banks. The difference would be in the ‘cost plus’ element. Banks that are more efficient would be able to offer better rates to customers,” said a banker.
However, the new framework will not bring about any changes in the cost of borrowing for consumers or impact the profitability of banks.
“It should have no impact on the effective lending rates charged to retail borrowers which are determined by various factors, including the borrower’s credit standing,” said the central bank.
A Bank Negara official said the new framework would not bring about a lower cost to consumers nor increase the profitability of banks.
“It is still the same. It calls for higher disclosure by banks on their pricing of housing loan rates. At the moment, it is not transparent,” said a Bank Negara official.
The BLR is the standard benchmark used by banks at present to determine the loan rates for consumers. The more efficient banks that enjoy a lower cost of funds offer rates as low as 2.4% below the BLR that is now pegged at an average rate of 6%.
However, it sometimes becomes difficult for customers to differentiate the rates between one bank and another because there is no breakdown in the cost of obtaining a loan.