What is the Base Lending Rate
(BLR)? Base Lending Rate (BLR) is a minimum interest rate calculated by
financial
institutions based on a formula which takes into account the institutions
cost of funds and other administrative costs. The BLR is almost always the
same amongst major banks. Adjustments to the BLR are made by banks at the
almost same time; although, the BLR does not adjust on any regular basis.
The BLR is usually adjusted at the time in correlation to the adjustments of
the
Overnight Policy Rate (OPR) which is determine by
Bank Negara Malaysia
(BNM)
during
Monetary Policy Meeting. Banks in some countries use the name "Prime
Rate" or "Prime Lending Rate" to refer to their Base Lending Rate.
On 1 November 1995,
Bank Negara Malaysia (”BNM”) imposed a ceiling on the BLRs quoted by banking institutions. The ceiling rate would be determined by
a formula. This framework was further revised on 1 September 1998 to enhance
the speed of transmission of changes in BNM’s monetary policy (via revisions
to intervention rate and
SSR) to changes in the economy’s interest rate levels.
In general, the formula for the ceiling BLR is calculated as follows:
Ceiling BLR = Adjusted BNM Intervention Rate + Fixed administrative charge
The ceiling BLRs for commercial banks and finance companies are
fundamentally different due to the way the Adjusted BNM Intervention Rate is
interpreted:
For commercial banks, the Adjusted BNM Intervention Rate = BNM Intervention
Rate x 80% / (1-SRR%)
For finance companies, the Adjusted BNM Intervention Rate = BNM
Intervention Rate / (1-SRR%)
Commercial banks have a lower Adjusted BNM Intervention Rate (compared to
finance companies) resulting in lower ceiling BLR as commercial banks have a
relatively lower cost of funds. This is due to the presence of zero-interest
current account balances.
In practice, the BNM Intervention Rate is taken as the prevailing BNM
3-month intervention rate (the previous month’s average KLIBOR was formerly
used). BNM set the fixed administrative charge at 2.50% initially, but on 1
September 2008 lowered it to 2.25% in order to promote greater operational
efficiency among banking institutions. Whenever BNM changes the intervention
rate or the
SRR, banking institutions are given 1 week to adjust their BLR to
comply with the new ceiling.
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