Reforming BLR

From a press release by Bank Negara a week ago (excerpt):

Industry Consultative Paper on New Reference Rate Framework for Financial Industry

Bank Negara Malaysia is issuing an industry consultative paper to the financial industry on a new reference rate framework to replace the base lending rate (BLR) quoted by financial institutions in the pricing of retail loans.

In the recent period, retail lending rates on new loans offered by financial institutions have been at a substantial discount to the BLR. This has resulted in a divergence between changes in the retail lending rates on new loans and the BLR of financial institutions, suggesting that the BLR has become less relevant as a reference rate for the pricing of retail loans….

…The proposed basis for setting reference rates will eliminate negative spreads to the reference rate going forward. Future changes to the reference rate will directly reflect changes to a financial institution’s funding costs due specifically to monetary policy changes, regulatory changes and market funding conditions. This is also important for effective monetary policy transmission. In addition, borrowers will be better able to compare lending rates between financial institutions for better informed decision making….

This is what the fuss is about:

Since the beginning of the global crisis, the Base Lending Rate (BLR) quoted by banks and the rate at which they actually lend to customers, has been going in two separate directions. That makes the whole concept of a “base” “lending” “rate” almost irrelevant – banks are keeping nowhere near the interest rate that was, from its initial inception, intended to be given only to the very safest borrowers. Nowadays, its closer to being the rate given to the worst (ok, that’s an exaggeration, though you get my drift).

This new reference rate, if and when it comes into effect, should make the concept of BLR a little less redundant than it already is.