Thursday, January 16, 2014

Thoughts on BLR replacement plan

We know that BNM is going to have a review on BLR as the lending based rate. This is because as we know the rates that are being offered for housing and other property loans especially are offered at BLR minus, some to as low as 2.5%, as I understand. This basically mean that as BLR is now 6.6% for most banks, BLR minus 2.5% - the rate is offered at 4.1% i.e. very attractive as compared to what were used to be. This very low rates is one of the main reason for properties to have moved up substantially and we are not alone - many countries are having the same predicament.

Years ago, BLR minus was unthought of as BLR was supposed to be the benchmark cost for banks - now it is not anymore as there used to be a method to calculate BLR. BLR minus would mean the banks are losing money - and we know banks would not be doing business at a loss. Hence, their costs of funds are actually much lower than BLR.

Now the issue is that if BNM is to move on with a replacement rate what would happen to all the BLR benchmark loans. Would they be changed? We know that BLR is a floating rate - hence if the costs of funds go higher, banks would be increasing their rates and our borrowing costs would go higher as well.

Assuming the benchmark is to change, what would the banks do? Would they instantly increase their rates? Would banks be fixing the rates to fixed rate (giving the borrower an option) as what many banks overseas are doing - which means the borrowers are getting at a fixed rate. How would all the loans letter of offer ("LO") be dealt with as we know rates is a sensitive thing - and I am very sure somewhere in the LO, the banks would have a clause that says they have the liberty to change the spread anytime they want.

Food for thought - as I am pretty sure BNM is already looking at this as one of the issue.

1 comment:

Big Sea said...

If poorly dealt with, this issue could have severe implication to our economy.