BR vs BLR in Malaysia

If you are keen about investing in property in Malaysia, Base Rate (BR) System and the Base Lending Rate (BLR) Structure are two cardinal metrics that you must know about.

The BR has replaced the BLR system since January 2, 2015. So when you apply for loans, banks across the country use this as the key reference rate.

Basic Background of Base Rate (BR)

But it is essential to understand the basis and background of the Base Rate. Home loans have a unique position in Malaysia.

Unlike, personal loans or purchase loans, the home loan rate was initially benchmarked against the Base Lending Rate Structure as fixed by the Malaysian Central Bank, Bank Negara.

Previously when the financial market is in good shape, the banks will offer home loans at BLR+ the specific amount a bank sets.

If the financial conditions are stretched, it is BLR- amount decided by the bank. This BLR was eventually replaced by the Base Rate System formally in January 2015.

So now the home loans in Malaysia have an interest rate based on the BR. The Base rate system is now the benchmark of the financial institutions’ fund expenses.

The final loan pricing is a combination of this interest rate other elements like

• Credit risk
• Liquidity issue
• Overall cost of operation
• The risk premium
• Margin of profit

This new BR framework, as a result, becomes a reflection of all these components considered together.

The Banks, unlike in times of BLR system, can determine the BR structure without intervention from the Central Bank.

So, in other words, they can now get an edge in the loan market based on their efficiencies under this new system.

Why Was the BLR System Switched to BR?

The basic question that comes to mind is why was the BLR system switched to BR? How is the latter more desirable than the former one?

According to the Malaysian Central Bank, Bank Negara Malaysia, the primary motive was to promote healthy competition between the various regional banks.

In many ways, the BR system is a function of the individual efficiencies of the banks and differs from one to another.

The basis of this calculation is significantly different from that of the earlier BLR system.

So, the BR varies depending on the cost of funds and individual Statutory Reserve Requirement of a specific bank.

The new system is seen as introducing better transparency in the system. The customers have a better say in deciding the best option for themselves.

Unlike the previous system, they can’t borrow below the base rate in this system.

How Does the Change of BLR to BR Affect You?

So the cardinal factor that worries home buyers and homeowners across Malaysia is how does this affect their overall loan liability?

How does the bank make the change for those who have applied for home loans before 2015?

Most importantly, what’s better for homeowners when you compare the BR Vs. BLR in the Malaysian housing loan space?  

Well, actually the overall difference is not very huge.

This is because the final loan liability of an individual is based on the Effective Lending Rate (ELR).

More than the BR, it is the ELR that determines how much the payout will be for individual customers.

In this context, the borrower’s don’t see a huge difference.

How is Effective Lending Rate (ELR) Calculated?

Well, you do understand that it is derived from the Base Rate but there are other factors associated with it.

Remember the ELR is calculated mostly in terms of floating rates for loans. The floating rate of interest though pegged on the BR has a few more elements.

ELR= BR + Spread Framework

Spread Framework is the catchphrase in this context. It includes a range of variants that affect the cost of funding for a bank. These are

• Profit Margin
• Operating Cost
• Liquidity Risk
• Credit Risk

So supposing the BR of a particular bank is 3.89% and it has a Spread Framework of 0.55%, the Effective Lending rate will be a sum of these two factors at 4.44%.

You can refer to the Bank Negara Malaysia website for the latest ELR rates that are offered by various banks.

Here is a quick look at how the BR Vs. BLR stacks up for some prominent banks in Malaysia.

The rates are as of Sept 2018:

Let us explain with an example:

Bank A BR is 3.25%

The home loan offer let’s say is BR+1.5%

So the Effective Lending Rate (ELR) is 3.25%+1.5%= 4.75%

Now how much was the bank offering the loans at earlier under the BLR?

Let’s say the BLR is 6.9% and the bank charged BLR- 2.10%.

So the Effective Lending Rate of BLR for Bank A stays around the same levels, which is 6.9%- 2.1%= 4.8%.

In this case, the monthly installment difference of BR and BLR is only RM15.74/month.

So, on the whole, there isn’t a whole lot of difference to the borrower under the new system.

But the onus is now more on the bank. It is but obvious that customers will make a beeline for banks with better efficiencies.

People with Existing Home Loans Before 2015

For those who have applied for loans before 2015, the payout is based on BLR. The Effective Lending Rate (ELR) that they are repaying the loan on is derived from the BLR.

So as of now, there is no change in your loan structure. You do not need to worry about how or why the BR works or changes loan tenures. You can continue paying your Equated Monthly Installment (EMI) as earlier.

However, it makes sense to understand the new structure. This will help you make an informed choice if you are planning to buy a new property.

It will also enable you to calculate the risk-reward ratios of real estate investment in a more comprehensive fashion under the new system.

But for those after 2015, the BR will apply for everyone.

Whether you apply for conventional loans or go for even the Islamic Loans, they are all tied to this Base Rate structure.

In case you want to refinance your home, change the existing loan structure or your bank, you need to understand the new provisions.

Remember they are all counted under new loans and will be processed according to the provisions of the Base Rate structure that has come to play since 2015 January.

Is BR System is Better Than BLR?

The question then veers on the most fundamental element.

Is the BR system a better one?

Experts and the Malaysian Central Bank have maintained that this is undeniably a more transparent system. The idea is to allow customers to leverage the efficiencies of a bank.

But if you ask us, we would say that this is a rather subjective issue and in many ways, it depends on how you are looking at it.

What in your approach is crucial in this case?

But it is true that the Base Rate is heavily based on the Kuala Lumpur Interbank Offered Rate (KLIBOR) and the Statutory Reserve Ratio (SRR).

The KLIBOR is essentially the inter-bank exchange rate, and the SRR is the Statutory Reserve Ratio that the Malaysian Central Bank decided.

Both these set of data is publicly published and updated on a regular basis.

There is nothing shady about how the bank arrives at the Effective Lending Rate (ELR) using this formula.

Experts also feel that this system allowing banks to take advantage of their efficiencies is a major positive.

They feel this will not just allow banks to be more competitive but allow customers to get the maximum benefit.

But you must remember what the Bank Negara has maintained and what we deduced in our previous example.

The Effective Lending Rate does not change drastically from the previous system with this BR structure.

So your tenure or Equated Monthly Installment (EMI) amount remains more or less similar under both these systems and that is the most important aspect for home loan applicants.

What Are the Impacts of Switching BLR to BR to the Banks?

A close study of the overall banking system in Malaysia reveals that the banking system has not seen a major upheaval as a result of this change in calculating the Base Rate.

Analysts say this switch from BLR to BR has not impacted their base business in a meaningful way.

It is more or less business as usual for banks across the country. The effective lending rate is still pretty much around the same levels.

There are many reasons for it. Most importantly, banks have the option to review it anytime if there are no perceptible changes in the Overnight Policy Rate (OPR).

If anything this new system spurs healthy competition amongst banks.

It is also seen as reflecting the rising cost of funds and forcing banks to undertake disciplinary steps to maintain efficiencies.

This is because the rates are now controlled by the banks and this will force them to take up measures that will help in reducing costs.

That is a win-win proposition for most customers and banks.

The only concern area is that the bigger players may have greater room to maneuver cost efficiencies and attract more customers.

Has BR Affected the Property Demand?

The other big question is has the shift from BLR to BR affected consumer demand. Has the Malaysian housing sector seen in the striking shift in demand as a result of this change?

In this context, it is very important to understand that the average consumer is more worried about the Effective Lending Rate (ELR) than the BR.

The ELR or the effective lending rate is the actual rate of interest that they are getting the loans at.

This will decide how they plan their EMI and take a call on loan tenure. On the whole, the new BR system actually benefit consumers more than banks. It is transparent and encourages banks to leverage their efficiencies.

There will be a far better choice of loan options for customers and help them make profitable choices.

However, the only point of concern at this stage is that of customers with questionable credit scores. Those with low income or bad credit scores may be at risk.

This is because the new system enables banks to set a higher ELR to keep their profit margins intact. This can lead to a considerably higher amount of default in this specific customer segment.

But with enough survey, you can obviously get around to deciding a loan that best addresses your limitations and challenges.  

3 Determining Factors on How BR is Calculated

Therefore, we can say that the Base Rate is calculated using three primary metrics.

These are not just publicly published information but the Malaysian Central Bank, BNM updates it at regular intervals depending on the overall market and liquidity situation.

A) Statutory Reserve Ratio (SRR)

The Bank Negara will determine a specific SRR level for every bank. This is primarily the minimum cash reserves that the bank needs to maintain before lending out.

The liquidity and the cost of lending are directly dependent on the SRR. The cost of lending rises if the SRR does. As a result, it also impacts the BR and leads to its subsequent rise.

B) Individual Bank’s Profit Margin

The BR also has a direct correlation with a bank’s profit margins. If the profits increase, the BR comes down and vice versa.

C) Overnight Policy Rate (OPR)

The OPR level is the other key determinant of the overall BR. If the Central Bank raises the OPR levels, the BR rises too.

As a result, the Base Rate now becomes a key indicator of the financial health of the bank too.

This is because banks that are more effective and have adequate savings and fixed deposits will offer more attractive rates.

Decreasing efficiencies can become the first sign of strain in the balance sheet and banks with lower resources may not be able to match the rates offered by bigger players with greater savings.

This also introduces distinct flexibility in the banking system and encourages healthy competition.

Conclusion

Therefore from a customer standpoint, you can easily conclude that there is no perceptible change in interest rates as a result of the switch from BLR to BR. But overall with the BR instead of BLR, it is more or less, business as usual.