Individual Banks To Fix Interest Rates For Auto Financing Based On Respective Strategies

Kuala Lumpur, April 20th 2009 – With respect to the report which appeared in a local daily today on the possibility of higher interest rates for car loans, the Association of Banks in Malaysia would like to state that the interest rates for car loans are determined by commercial banks respectively based on their cost of funds, funding availability, loan growth and business strategies.

The important point to note is that hire purchase (HP) business is on a flat rate - fixed term/ tenure basis and is therefore not pegged to the base lending rate (BLR). Funding for this type of portfolio is generally through hedging with long term funds such as Interest Rates Swap, Cagamas or internal funds transfer. Typically, longer tenure loans attract higher funding cost on the part of the commercial bank. At this point in time and based on the prevailing interest rates for car loans, there is a mismatch or gap between the funding cost to the commercial banks and the interest rates for car loans. For Example, the average Interest Rates Swap for 7 years is 3.85 percent whilst the Cagamas rate for the same tenure is at 5.30 percent. Further, as in all costs of doing business, a small overhead cost and provisioning are added to the main cost component, i.e. the banks' cost of funding. The prevailing interest rates for car loans do not accordingly address the funding cost and/or the cost of doing HP business.

Any changes in the interest rate structure for car loans will be premised on the objectives of ensuring the sustainability and viability of HP business besides that of narrowing the mismatch and gap between the funding cost and the lending rates as mentioned. In addition, consideration is being given to the following:

• The interest rates may be tiered with lower interest rates for shorter tenures
• Lowering the interest rate tier for new national cars for the 5-year and 7-year tenures
• Streamlining the interest rates between the new non-national cars, new national cars and used cars
• Rationalizing the rates for the new non-national cars and used cars

Commercial banks are examining their options and will make such adjustments to best suit their business models and customers. Notification of any interest rate changes will be made by the banks promptly to all respective stakeholders including their panel of car dealers. It is imperative that customers study the best financing options offered by commercial banks first before making a decision.

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