Banks on why loan rates lag cut in key interest rate

FOLLOWING the reduction in the overnight policy rate (OPR) by 75 basis points to 2.5%, which subsequently went to down to 2%, banks have adjusted their mortgage rates to competitive levels that are below their base lending rates (BLRs).

A few aggressive ones had initiated the reduction in mortgage rates to as low as 3.2%–3.3% while others took some time to catch up. This led to questions on why some banks were not reducing their mortgage rates fast enough.

Banks surveyed by StarBizWeek say changes to loan rates were usually not done immediately after every revision of the OPR, as they had to complete several internal processes to consider the impact of any change.

Most banks, nonetheless, would revise their financing rates within a week after the central bank announced the changes to OPR which has been kept unchanged at 2% since February.

OCBC Bank (M) Bhd director and CEO Jeffrey Chew said while banks tried to respond as quickly as possible, they needed to balance all the factors involved in the pricing equation.

“We need to evaluate our overall strategy for running the business, cost of funds, marketing strategy for attracting new customers while retaining the existing ones, as well as sales and administration costs,” he says.

Alliance Bank Malaysia Bhd group CEO Datuk Bridget Lai says factors determining the pricing structure included the customer’s risk profile, collateral, loan tenure and market competition.

Ultimately, the bank’s goals are to protect the quality of its asset portfolio while driving up productivity, efficiency and service levels, she says.

RHB Bank head of retail banking Renzo Viegas says that upon an announcement of a cut in the OPR, the bank’s central treasury together with related business segments in the group would immediately carry out their analysis, following which the new rates would be keyed into the system.

“Changes are overnight with all the loans that have rates pegged to the BLR revised. Concurrently, the website and all point-of-sale interactions within the bank are also updated,” he adds.

While floating rates pegged to the BLR are easy to revise, given that adjustment is automatic, he says the fixed rate module is tougher due to profitability issues, as these fixed rates are already built into the pricing structure.

Both RHB’s conventional and Islamic banks revised their respective lending rates within a week after Bank Negara’s monetary policy change.

According to RHB Islamic Bank head of asset based finance group Zulkhairi Zabiri, property developers’ discounts, coupled with banks’ cheap financing, were attracting individuals to buy properties.

“We do see an upward trend in demand for this segment and we observe a similar trend for commercial properties,” he says.

Chew of OCBC concurs. He says companies are less sensitive to changes in the cost of funds as their need for loans depended more on demand for their products and services.

“If there’s strong demand, businesses tend not to mind slight increases in interest costs. The factors include credit availability, turnaround time and service delivery,” he says.

This was evident last year when most banks recorded significant loans growth despite the BLR being at a higher rate of 6.5%, as the business environment was conducive with individuals spending and companies investing.

By The Star (by Yeow Pooi Ling and Laalitha Hunt)