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What is Base Rate and why is it replacing Base Lending Rate?

Posted in Bank Negara Malaysia (BNM), and Personal Finance

I remember long time ago, when I took my first home loan, it was BLR + 1%. Then, it became just BLR. Soon it became BLR – 1% and today we can find home loans which are BLR – 2.4%. Base Lending Rate was supposed to be what it’s name suggested, the base lending rate. The banks would then add a certain percentage on top of BLR indicating the cost of funds for that loan. However, these days, BLR no longer plays its part and BNM say it is no longer transparent.

blrBy 2nd January 2015 next year, the new reference rate, called the Base Rate would be effective and it is touted to be more transparent and allows customers to easily identify financial institutions that are offering the best rates for loans. It will comprise of Base Rate and the ‘cost plus’ “Financial institutions would be given the flexibility to determine their respective benchmark rates,” said Bank Negara in a statement.

The Base Rate is determined by banks’ cost of funds and will differ marginally from one bank to another. In essence, it meant that banks which has access to cheaper funds such as long-term deposits will be able to offer a lower Base Rate compared to banks that depends on inter-bank market for funding. Suddenly you realise, hey, there are some banks which are offering special FD nowadays! Some advertised up to 4% instead of the usual 3% that you normally get. Yes, perhaps that’s one way they are gearing up for it. No bank would want to offer the highest Base Rate.

The “cost plus”, would be elements such as the financial institution’s over-heads and the credit risk profile of borrowers. Actually this is not such a huge difference from today because buyers who has a higher risk profile are also charged a higher rate anyway. However this rate would spur the banks to be even more efficient because if they have high overheads, it is not possible for them to offer competitive rates. Think more ONLINE instead of more bank branches and you may have an idea. Perhaps even fewer Branch Managers but more team leads for small kiosk type of branches in departmental stores or hypermarkets.

In fact, BNM is also trying to phase out bank cheques and favouring online transactions instead. If BLR is no longer relevant and every bank is not using it as a benchmark but instead using BLR minus up to 2.4%, then the Base Rate does make more sense. Personally I look forward to it.

written on 20 March 2014

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