Base Rate (BR) Vs Base Lending Rate (BLR)
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For us to understand the relationship between the Base Rate (BR) and the Base Lending Rate (BLR) in Malaysia,and how they affect the economy,we will have to what both terms mean.
What is Base Rate ?
BR rate is the interest that is set by the Bank Negara Malaysia.This rate forms the basis used in the calculation of the cost charged during the lending of loans.Although commercial banks are allowed to set their interests and charges on savings,in most cases the rates are set by the Bank Negara Malaysia.This way,the central bank can discourage or encourage expenditure depending on the state of the economy.
The Definition of Base Lending Rate
This is the least interest rate that a financial institution charges on a loan. It is sometimes determined by the interests banks or financial institutions charge each other.The costs of borrowing that money to further lend to borrowers,can also be a factor in setting the Base Lending Rate.
Recently,the the BLR rate has been replaced with the BR system.Consequently.the Br has become the main reference when considering the costs of the loans.This way,Malaysia is now able to influence the interest rates based on the formula the Bank Negara Malaysia has set.This formula was determined by the costs incurred during the lending of other institutions process.The basis of costing was the Overnight Policy Rate(OPR).However,with the recent Br that took effect on January 2, 2015,the rates are based on the costs banks have incurred and the Statutory Reserve Requirements(SRR).
There are other factors that influence the charges sent on a particular loan,and will appear in the new Br framework,them being:
- Operations Cost
- Profit margin
- Liquidity risk premium.
- The financial state of the bank
- Legal requirements
The Changes Triggered by The BR and The BLR
The BR rates are set by the individual banks without the Bank Negara Malaysia’s influence.The br rates will differ from one bank to another based on the ability to lend and convenience of operations at a certain time.the changes have encouraged transparency in such a way that,no bank can offer low interests to increase the lending growth.This way,customers make better financial decisions.
Effects to The Buyer
The buyers will somehow pay the same interest they were paying previously. Remember,banks differ in operations and size,and will cost their loans in different approaches.However,the banks will have to reveal their margin to ensure there is an Effective Lending Rate.On the other side of it,they will have many banks to choose from and find that institution that will suit the type of loan they require.
Effects To the Banks
The change from the BLR to BR will no doubt force some changes in the banks operations.It will increase competition amongst them since they will all have to set friendly rates to attract borrowers.They will also have to improve their services to retain the existing borrowers. However,small financial institutions must take greater caution in lending the money as they stand to loose in that moment of competing with the bigger firms.The bigger firms can find mechanisms to maneuver and improve their lending systems.
This approach can be looked in a number of ways. Technically,both ways would stand to raise or sustain the economy.The switch does not also affect the demand of property in any way. For any buyer,it is important that they consider the new and old systems,and dwell more on the rates with individual banks.That way,they will decide easily and which one to take up.
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