Bank Negara to issue consultative paper on new reference rate that will replace BLR

Bank Negara says the proposed changes in the reference rate framework will not have an impact on effective lending rates charged to retail borrowers.

PETALING JAYA: Bank Negara will issue an industry consultative paper to the financial industry on a new reference rate framework to replace the base lending rate (BLR) regime quoted by financial institutions in the pricing of retail loans.

The central bank said in a statement that under the proposed framework, the new reference rate would be determined by the respective financial institution’s funding costs, which reflect its specific funding structure and strategy, and the statutory reserve requirement.

“Other components of pricing such as borrower credit risk, liquidity risk premiums, operating costs and profit margins are proposed to be reflected in the spread to the reference rate,” Bank Negara said.

“Currently, there is insufficient transparency in the basis adopted by individual financial institutions for setting the BLR, which reduces the sensitivity of the BLR to changes in an institution’s funding costs and comparability across institutions,” it added.

The central bank justified that this was necessary, given that in the recent period, retail lending rates on new loans offered by financial institutions have been at a substantial discount to the BLR.

This had resulted in a divergence between changes in the retail lending rates on new loans and the BLR of financial institutions, suggesting that the BLR had become less relevant as a reference rate for the pricing of retail loans, it added.

“The new reference rate aims to improve the transmission of monetary policy to both new and existing borrowers, and promote a transparent pricing of floating rate retail loans that is more reflective of market conditions,” Bank Negara said.

The proposed changes in the reference rate framework will not have an impact on effective lending rates charged to retail borrowers, which are determined by a range of factors, including the financial institution’s assessment of a borrower’s credit standing.

The statement said these changes mainly served to strengthen the link between retail lending rates and the reference rates that financial institutions used to manage the risk of future changes in the funding costs incurred by the financial institutions in providing the loans.

The new reference rate will be used for the pricing of new retail loans and the refinancing of existing loans after the effective date of the new framework.

“Existing loans will continue to be referenced against the BLR. However, when a financial institution makes any adjustments to the new reference rate, a corresponding adjustment will also be made to the BLR,” it said.

It is important to note that the changes in the reference rate framework did not represent a change in the monetary policy stance, said Bank Negara.

The central bank has given financial institutions until Feb 14 to provide feedback pertaining to the proposed reference rate framework.