Why banks adjust their interest rates

June 1, 2016
Kuala Lumpur, Wednesday, 1 June 2016:- The Association of Banks in Malaysia (ABM) wishes to clarify a couple of recent reports regarding the increase in base rates (BR) and base lending rates (BLR) of a few commercial banks.

From 2 January 2015, commercial banks may revise the level of their reference rates (both BR and BLR) in response to a change in their funding costs, regardless of whether there is a change to the overnight policy rate (OPR). This is in line with the new Reference Rate Framework which was announced by Bank Negara Malaysia in 2014.

Generally, commercial banks raise funds from various sources which include deposits, wholesale and equity markets. In addition to the OPR, the cost of raising funds would depend on several factors such as the banks’ credit ratings, market funding conditions and competitive pressures.

A few banks have recently increased the BR and BLR mainly due to a hike in the total costs of funding. The downward trend of the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) in Q1 of 2016 was insufficient to offset the rise in the total funding costs experienced throughout 2015 and 2016. This is the first time these banks have revised their BR and BLR. Despite the increase, the BR of these banks remain below the average BR for the industry of 3.89% as at Q1 2016.

It must be pointed out that following the recent reduction in the Statutory Reserve Requirement (SRR) ratio from 4% to 3.5% effective 1 February 2016, a number of banks reduced their BR and BLR. The decisions by the banks in revising their BR and BLR were in accordance with the policy framework and internal governance of the institutions concerned.

For any adjustment to the BR and BLR, banks are obligated to provide borrowers with particulars of the revised monthly instalment amount at least 7 calendar days prior to the date the revised instalment comes into effect. If the change in the monthly instalment amount is less than RM50 per month or the bank’s internal threshold amount (whichever is the lower) a bank is permitted to retain the borrowers’ monthly repayment amount. If, however, the change is more than RM50 per month or the threshold, banks are allowed to revise the monthly instalments unless a specific request is made by the borrower to retain the amount.

Members of the public who may have enquiries on the matter are welcomed to contact us at our ABMConnect hotline by dialing 1-300-88-9980, or emailing us at eABMConnect by logging on to our website, www.abm.org.my.
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