KUALA LUMPUR: Proposals to change how banks calculate the interest for hire purchase agreements will be unlikely to have a material impact on the lenders, says RHB Research.
"We think the proposed change in interest calculation for hire purchase to reducing balance from Rule 78 will not likely be a material event.
"Banks have sufficient levers in place to support earnings, and dividend growth to help tide investors through this volatile period," said the research firm in its sector update, while reiterating its "overweight" recommendation.
A news site reported earlier this week that the Consumer Credit Oversight Board Task Force has proposed the removal of Rule 78, which pre-calculates interest changes on hire purchase contracts, as part of efforts to modernise the Hire Purchase Act 1967 (HP Act).
Under Rule 78, interest is calculated upfront based on the total principal, and does not take into account the reduction in principal outstanding after each repayment made by the borrower.
"Hence, borrowers pay a greater portion of interest in the earlier period of the loan tenure and those that opt for early settlement will be faced with a higher principal amount outstanding, compared to other methods of calculating interest payments.
"As such, this method is expected to be replaced with the more conventional reducing balance method," said RHB.
Other proposed changes mentioned in the news report include the acceptance of digital and electronic signatures for HP agreement processes.
According to to RHB, the proposed changes will only apply to new hire purchase contracts signed after the relevant changes are made to the HP Act.
However, RHB said banks are already recognising interest income from hire purchases using the effective interest rate method, while also maintaining the repayment schedule based on Rule 78.
The research firm said an adjustment will need to be made for the difference in balances between Rule 78 and effective interest rate calculation for early settlement cases.
"Overall, we do not expect the impact from the switch to be material given this change does not apply retrospectively, and we expect banks to keep the effective interest rate unchanged," it said.
It added that should banks move to a floating rate method for hire purchases after the change, the rate leverage for banks would be raised and potential modification losses would be mitigated in the event of a loan moratorium programme similar to what took place in 2020.
