BNM revises Reference Rate Framework

Standardised base rate will be used from next August as the benchmark for all banks for their new retail floating-rate loans

PETALING JAYA: Bank Negara Malaysia (BNM) yesterday announced the release of the revised Reference Rate Framework, effective Aug 1, 2022, where the standardised base rate will replace the base rate (BR) as the reference rate for new retail floating-rate loans.

Reference rates are publicly accessible interest rates that are used by financial institutions as a basis for pricing loans. The Reference Rate Framework was introduced in 2015, which established the BR as the reference rate for retail floating-rate loans in Malaysia. Under this framework, financial institutions use different methods to set their respective BR, 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 BR methodologies across banks have resulted in a more uneven transmission of monetary policy.

Under the revised Reference Rate Framework, the standardised base rate will be used as the common reference rate for all financial institutions for their new retail floatingrate loans. The standardised base rate will be linked solely to the Overnight Policy Rate (OPR). Changes to the standardised base rate will therefore only occur following changes in the OPR, 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 standardised base rate. The OPR as the standardised base rate improves comparability and is more transparent to consumers.

“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,” BNM governor Datuk Nor Shamsiah Mohd Yunus said.

The standardised base rate will take effect as the reference rate for the pricing of new retail floating-rate loans and the refinancing of existing loans from Aug 1, 2022 onwards. The one-year transition period will provide sufficient time for financial institutions to undertake the necessary preparations to ensure a smooth implementation of the revised framework.

The shift towards the standardised base rate will have no impact on the effective lending rates of existing retail loans, which will continue to be referenced against the BR and base lending rate (BLR). After the effective date, the BR and BLR will move in tandem with the standardised base rate as any adjustments to the standardised base rate will simultaneously be reflected in the corresponding adjustments to the BR and BLR. As such, banks will continue to display their BR and BLR, in addition to the standardised base rate at all branches and websites after the effective date for customers’ reference.