New framework won't impact lending rates: Bank Negara

PETALING JAYA (Jan 17, 2014): Bank Negara Malaysia (BNM), which announced the issuance of an industry consultative paper on a proposed reference rate framework to replace base lending rate (BLR) yesterday, does not expect changes to the framework to impact lending rates charged to retail borrowers.
The central bank said these rates are determined by a range of factors, including the financial institutions assessment of a borrower's credit standing, adding that existing loans will continue to be referenced against the BLR.
"These changes mainly serve to strengthen the link between retail lending rates and the reference rates that financial institutions use to manage the risk of future changes in the funding costs incurred by the financial institutions in providing the loans. It is important to note that the changes in the reference rate framework do not represent a change in the monetary policy stance," Bank Negara said in a statement yesterday.
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.
Bank Negara said while existing loans will continue to be referenced against the BLR, when a financial institution makes any adjustments to the new reference rate, a corresponding adjustment will also be made to the BLR.
A financial weekly reported recently that Bank Negara's proposal for a new reference rate framework ties in with the risk-informed policy document released by the central bank last month, that calls for banks to price their loans in line with the risks that they take.
A banker told the financial weekly that the move seemed to indicate that the regulator thinks that banks are underpricing the risks they take and therefore pricing household loans, especially mortgages, too low.
Financial institutions are given until Feb 14, 2014 to provide feedback to BNM on the proposed reference rate framework.
Bank Negara said the proposed changes in the reference rate framework will have 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.
Under the proposed reference rate framework, BNM said, the new reference rate will 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 the proposed basis for setting reference rates will eliminate negative spreads to the reference rate going forward.
It 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.
Future changes to the reference rate will directly reflect changes to a financial institution's funding costs due specifically to monetary policy changes, regulatory changes and market funding conditions.
This, Bank Negara said borrowers will be better able to compare lending rates between financial institutions for better informed decision making.
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.
ENDS