Bank Negara introduces new interest rate mechanism
NST 24/04/2004 Zainul Arifin

KUALA LUMPUR, April 23: Bank Negara today introduced a new, more market-oriented interest rate mech-anism that will trigger greater competition among banks and finance companies, likely to result in lower lending rates for some products.

Under the new framework that will take effect immediately, banks will have more flexibility in determining their lending rates for their range of products.

Governor Tan Sri Dr Zeti Akhtar Aziz said from now on, banks would determine their own base lending rates, or BLRs, based on a newly introduced overnight policy rate (OPR), and thus be able to adopt a more competitive rates pricing strategy.

Bank Negara will only need to be informed seven days before of any changes planned in the BLRs by banks, she said.

Previously, the BLR, a major factor in the determination of lending rate, was fixed by Bank Negara at six per cent.

The use of the OPR now fixed under the new framework at 2.70 per cent as an anchor to calculate BLRs, as opposed to the use of the 4.5 per cent intervention rate under the previous mechanism, will lead to lower bank lending rates in the medium-term, analysts said.

To promote competition and let consumers shop around for the best rates to suit their needs, Bank Negara will from June display on its Bankinfo website comparative interest rates of all products offered by banks and finance companies.

"Bank Negara will monitor them to make sure fair and just pricing to safeguard consumer interests," she said at Bank Negara when announcing the new interest rate mechanism.

"The new interest rate mechanism allows banks to set their own base lending rates based on their cost structures and business strategies," said Association of Banks in Malaysia executive director Wong Suan Lye.Mayban Securities' banking analyst Norli Abdul Khalim said competition among financial institutions on rates would be good for consumers.

"It's a very competitive environment in the banking industry at the moment, so banks need to have low interest rates and an efficient cost structure.

"They also cannot simply raise their interest rates to, let's say, BLR plus four or five per cent, as borrowers would turn to their competitors instead," she said.

Zeti said some banks were already offering competitive rates, some below the BLR of six per cent, such as for mortgages. Industry estimates put the current average lending rate at 6.11 per cent.

She also said in line with the more transparent structure, lenders would from now on have to have a higher degree of disclosure on the lending rates, fees and charges, as well as risks associated with specific financial products.

"(The rate) change is being introduced at a time when monetary policy can remain unchanged for some time to come and thereby continue to remain supportive of the economy," she said.

Low interest rates will remain for some time because of a favourable economic and financial environment, monetary and financial stability, progress in financial infrastructure development and low inflation, she said.

Zeti also announced that the minimum interest rates for fixed deposit would be retained at current levels for deposits of a year or less, to make sure depositors have a positive real rate of returns.

The current interest rates for fixed deposits of RM1 million or less are three per cent for one-month deposits and 3.70 per cent for 12-month deposits.

To ensure the availaibility of cheaper funds for some, the special funds for small and medium-sized enterprises would continue to be tagged at between 3.75 per cent and five per cent.

Lending for the priority sector, such as housing loans for the lower income group for purchase of homes at RM180,000 and below, will still be capped at the lower of BLR + 1.75 per cent or nine per cent.