Confusion over BR, ELR and spreads

The latest base rates (BR) and effective lending rates (ELR) of various banks in Malaysia is sowing confusion among consumers as they try to figure out exactly how much they may save on loans.

Based on the list of various BR and ELR published on the Bank Negara Malaysia (BNM) website on Friday, there doesn’t seem to be a consistent way to calculate exactly what savings a consumer could get when shopping around for loans.

The list at the BNM website shows the indicative ELR for a standard 30-year housing loan of RM350,000. What it doesn’t explain is why there seems to be such a wide range of BR and indicative ELR.

For example, Malayan Banking Bhd (Maybank) has the lowest BR at 3.2%. But its ELR, after factoring in its operational costs and average customer risk margin, is set at 4.55% – resulting in a spread of 1.35%

Then you have Ambank (M) Bhd, which has set its BR at 3.99% but its ELR is 4.45% – resulting in a spread of only 0.46%!

Based on these two sets of figures alone, there are several possible conclusions a customer could arrive at.

The first would be that Maybank has the lowest funding cost, based on its BR of 3.2% being far lower than other banks.

The second would be that Maybank is rather inefficient in managing operational costs, due to its spread being 1.35%, when compared to Ambank’s mere 0.46%.

The third would be that a customer could possibly use Ambank’s rates to negotiate lower interest at Maybank, which may be able to reduce its spread to remain competitive and win the customer.

The problem lies in the assumptions made in the second and third conclusions – what if Maybank and Ambank had used different factors to calculate their spreads?

Is it also possible to reach a fourth conclusion that there could be further hidden charges over and above the ELR for both banks – which the customer learns of only after submitting the necessary loan applications?

If BNM had wanted to promote transparency on bank charges with the new BR and ELR regime as of Jan 2 this year, this intent doesn’t seem to have been achieved so far.

There is a need for BNM to make it clear exactly what banks must include when calculating the BR and ELR – plus what should be excluded, and published as extra charges.

Only then can there be some consistent way for the average customer to conduct comparisons in some meaningful manner and not continue to be confused over exactly what the bank charges are.

To get an idea of just how difficult it is to meaningfully compare the current BR and ELR offered by various banks , here’s the list at the BNM website. - By The Rakyat Post

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