Rule of 78 removal might prompt banks to raise rates

The change could also pave the way for similar reforms in other consumer financing products, such as hire purchase loans, which could have a larger impact on the banking sector, Phillip Capital Research noted.

PETALING JAYA: Bank Negara’s proposed amendments to abolish using Rule of 78 in personal financing under the Hire Purchase Act 1967, which will reduce front-loaded interest income and potentially pose higher reinvestment risk for banks from early repayments, could be managed by raising effective interest rates, Phillip Capital Research says.

“If banks can no longer benefit from front-loaded interest income and early loan repayments become frequent, this would increase reinvestment risk for banks, as they may face higher portfolio turnover and be forced to redeploy funds in potentially lower-yielding assets.