BNM Revises Reference Rate Framework in Malaysia
The Bank Negara Malaysia (BNM) revised the reference rate framework, which will be effective from August 01, 2022. Under the revised framework, the Standardized Base Rate will replace the Base Rate as the reference rate for new retail floating-rate loans. The one-year transition period will provide sufficient time for financial institutions to undertake the necessary preparations and system enhancements to ensure a smooth implementation of the revised framework.
The reference rate framework, which was introduced in 2015, established the Base Rate as the reference rate for retail floating-rate loans in Malaysia. Under this framework, financial institutions use different methods to set their respective Base Rate, which has made it more difficult for consumers to compare the retail loan products offered by each financial institution and understand the reasons behind changes in their loan repayments. In addition, the different Base Rate methodologies across financial institutions have resulted in a more uneven transmission of monetary policy. Under the revised framework, the Standardized Base Rate will be used as the common reference rate for all financial institutions for their new retail floating-rate loans. The Standardized Base Rate will be linked solely to the Overnight Policy Rate. Changes to the Standardized Base Rate will, therefore, only occur following changes in the Overnight Policy Rate, which is determined by the Monetary Policy Committee of BNM. Other components of loan pricing such as borrower’s credit risk, liquidity risk premium, operating costs, profit margin, and other costs will continue to be reflected in the spread above the Standardized Base Rate.
The shift toward the Standardized Base Rate will have no impact on the effective lending rates of existing retail loans, which will continue to be referenced against the Base Rate and Base Lending Rate. After the effective date, the Base Rate and the Base Lending Rate will move in tandem with the Standardized Base Rate, as any adjustments to the Standardized Base Rate will simultaneously be reflected in the corresponding adjustments to the Base Rate and the Base Lending Rate. New retail borrowers should be largely unaffected by this revision, as effective lending rates for new borrowers would continue to be competitively determined and influenced by multiple factors, including a financial institution’s assessment of a borrower’s credit standing, funding conditions, and business strategies.
Keywords: Asia Pacific, Malaysia, Banking, Reference Rates, Reference Rates Framework, Credit Risk, Liquidity Risk, Benchmark Reforms, Interest Rate Risk, BNM
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
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