Bank Negara Malaysia (“BNM”) has released the revised Reference Rate Framework (“the revised Framework”). The revised Framework will be effective 1 August 2022. Under the revised Framework, the Standardised Base Rate will replace the Base Rate (“BR”) as the reference rate for new retail floating-rate loans.
The revised Framework will take effect for the pricing of new retail floating-rate loans and the refinancing of existing loans from 1 August 2022 onwards. This provides a one-year transition period for financial institutions to undertake the necessary preparations and system enhancements to ensure a smooth implementation of the revised Framework.
For those who do not know, financial institutions use reference rates as the basis for pricing loans. These are publicly accessible interest rates. First introduced in 2015, it establishes the BR as the reference rate for retail floating-rate loans in Malaysia.
What are the changes?
All financial institutions will use the Standardised Base Rate as the common reference rate for their new retail floating-rate loans.
The Standardised Base Rate will solely to the Overnight Policy Rate (“OPR”). Therefore, changes to the Standardised Base Rate only occur when there are changes in the OPR, set by the Monetary Policy Committee of BNM. Additionally, the spread above the Standardised Base Rate will continue to reflect other components of loan pricing. For example, borrower’s credit risk, liquidity risk premium, operating costs, profit margin and other costs.
There is no impact on the effective lending rates of existing retail loans. They will continue to be referenced against the BR and Base Lending Rate (“BLR”). After the effective date, the BR and BLR will move exactly in tandem with the Standardised Base Rate.
New retail borrowers are also largely unaffected by the revised rate framework, as effective lending rates for new borrowers would continue to be competitively determined and influenced by multiple factors. That includes a financial institution’s assessment of a borrower’s credit standing, funding conditions and business strategies.
Why is there a need for the Revised Reference Rate Framework?
Currently, financial institutions use different methods to set their respective BRs. Hence, has made it more difficult for consumers to compare the retail loan products offered by each financial institution. It is also difficult for consumer to understand the reasons behind changes in their loan repayments. Additionally, the different BR methodologies across financial institutions have resulted in a more uneven transmission of monetary policy.
The OPR as the Standardised Base Rate improves comparability and is more transparent to consumers. Governor Datuk Nor Shamsiah said “Consumers would find it easier to understand changes in their loan repayments as the OPR will be the only driver of the Standardised Base Rate. The Standardised Base Rate will also facilitate effective monetary policy transmission as complete adjustments to retail loan repayments will take effect following a change in the OPR.”
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