BNM standardizes the reference rate used in variable rate loans


The “standardized base rate” will replace the “base rate” as the benchmark rate for new variable rate retail loans effective August 1, 2022.

BNM (Bank Negara Malaysia) has published a revised benchmark rate framework, under which the standard base rate will replace the base rate as the benchmark rate for new variable rate retail loans.

The current benchmark rate framework was introduced in 2015, establishing the prime rate as the benchmark rate for variable rate retail loans in Malaysia.

Under the current framework, financial institutions use different methods to set their respective base rates, which has made it more difficult for consumers to compare the retail loan products offered and to understand the reasons for the changes in their loan repayments. , BNM said.

“In addition, the different [Base Rate] methodologies between financial institutions have resulted in a more unequal transmission of monetary policy.

As part of the revised benchmark rate, the standardized base rate will be used as the common benchmark rate for all financial institutions for new variable rate retail loans. The standardized base rate will be linked only to the overnight policy rate (OPR), which is determined by the BNM’s monetary policy committee.

“The OPR as a standardized base rate improves comparability and is more transparent for consumers,” said the BNM, adding that the change would also facilitate more efficient transmission of monetary policy.

Other elements of loan pricing, such as the borrower’s credit risk, liquidity risk premium, operating costs, profit margin and other costs, will continue to be reflected in the deviation above the standardized base rate.

The standardized base rate will take effect as the benchmark rate for the pricing of new variable rate retail loans and the refinancing of existing loans as of August 1, 2022.

The one-year transition period should allow sufficient time for financial institutions to undertake the necessary preparations and system improvements to ensure smooth implementation of the revised framework.

The switch to the standardized base rate will have no impact on the effective lending rates of existing retail loans, which will continue to refer to the base rate and the base lending rate (BLR).

After the effective date, the base rate and BLR will move in tandem with the standardized base rate, so financial institutions should continue to post the base rate and BLR, in addition to the base rate. standardized, across all branches and websites.

More information on the revised benchmark rate framework is available available here.

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