Standardised Base Rate Vs Base Rate: How Does SBR Work?
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As announced by Bank Negara Malaysia (BNM) on 11 August 2021, the Standardised Base Rate (SBR) has replaced the Base Rate (BR). Since 1 August, 2022, SBR is the main reference rate for new retail floating-rate loans and financing facilities.
This allows banks in Malaysia to determine their interest rate based on a formula set by the central bank. So how does this relate to your loan interest rate which can vary from time to time?
From BLR, BR to SBR
Let’s go back to the beginning. The old Base Lending Rate (BLR) was based on how much it costs to lend money to other financial institutions. Meanwhile, the cost to borrow money was determined by the Overnight Policy Rate (OPR) set by the central bank.
When BR was implemented in 2022, interest rates were determined by the individual banks’ benchmark cost of funds and Statutory Reserve Requirement (SRR).
How is SBR different? The main feature of the SBR is in its standardisation as the common reference rate for all banks. Unlike the BR, which differs for each bank, the SBR is the same across banks.
Another key aspect of the SBR is that it is linked solely to the overnight policy rate (OPR). This is another simplification compared to the previous BR, which was previously determined by both the banks’ individual benchmark cost of funds, as well as the cost of holding non-interest-bearing statutory reserves with BNM.
Why the change to SBR?
According to BNM, the BR that was introduced in 2015 was intended to improve transparency and discipline in the pricing of retail loans, while enhancing the transmission of monetary policy. For a time, this appeared to work well. However, since this framework allowed banks to adopt bank-specific BR methodologies that were reflective of their funding strategies, each banks’ BR methodologies became more complex over time. This in turn led to reduced transparency and comparability of BRs across different banks, making things more difficult for the consumer.
As such, the SBR was introduced to promote a transparent reference rate that facilitates meaningful comparisons of loans across banks to allow consumers to make informed decisions, reinforce sound practices in the pricing of retail floating-rate loans by banks, and preserve the effective transmission of monetary policy decisions.
Image source: BNM
How does the switch to SBR affect you?
The switch from BR to SBR should make it easier to understand that repayment installments will only change when there is a change in the OPR, unless there is an increase in consumer credit risk, for example, if you fail to make repayments. This means that consumers will have a more transparent picture when it comes to repaying their loans.
Additionally, since the SBR is standardised across all banks, there is no longer a need to compare differences in computation of BRs across banks. This makes it easier for consumers to compare their options across multiple banks.
How does it affect your loan interest rate?
For existing borrowers, the move to SBR does not affect lending rates of existing retail floating-rate loans. For new borrowers, the lending rates for retail borrowers are largely unaffected by the move to SBR. However, borrowers’ lending rates and loan repayments may still be affected by other factors, such as borrowers’ credit risk profile (e.g. repayment track record).
In order to compare interest rates across banks, you can take the following as an example:
Interest rate = SBR + spread
As such:
| Interest rate on loan | SBR | Spread | |
|---|---|---|---|
| Bank A | 3.75% | 2.25% | 1.5% |
| Bank B | 4.25% | 2.25% | 2.0% |
Since SBR is now fixed across banks, differences in effective lending rates are solely driven by the spread charged by individual banks.
What is Effective Lending Rate (ELR)
According to BNM, ELR is the all-in rate that affects repayment amount. The ELR is arrived at by adding reference rate (like the SBR) and the spread that the bank uses.
The spread or range of interest that the bank decides to charge you for your loan includes assessing your credit profile, liquidity risk as well as the bank’s operating costs and profit margin. As shown in the chart above, the spread is generally fixed throughout the tenure of the loan.
So, the main change to the ELR is the change in the OPR that directly affects the SBR for floating rate loans.
What should borrowers compare when applying for loans?
In order for consumers to get the best deal out of their loans, they should compare the effective lending rates (ELR). This refers to the spread above the SBR quoted by different banks before taking a new loan.
Banks usually have a product disclosure sheet (PDS) that can be easily found online. These provide key information on financial products offered by banks, including on the ELR and total repayment amount for the loan you are considering.
| Financial Institution | Base Rate (%) | Base Lending Rate (%) | Standardised Base Rate (%) | Indicative Effective Lending Rate (%) |
|---|---|---|---|---|
| Affin Bank Berhad | 3.95 | 6.81 | 3.00 | 4.55 |
| Alliance Bank Malaysia Berhad | 3.82 | 6.67 | 3.00 | 4.36 |
| AmBank (M) Berhad | 3.85 | 6.70 | 3.00 | 4.50 |
| Bangkok Bank Berhad | 4.47 | 7.12 | 3.00 | 5.67 |
| Bank of China (Malaysia) Berhad | 2.75 | 6.35 | 3.00 | 4.55 |
| CIMB Bank Berhad | 4.00 | 6.85 | 3.00 | 4.75 |
| Hong Leong Bank Malaysia Berhad | 3.88 | 6.89 | 3.00 | 4.75 |
| HSBC Bank Malaysia Berhad | 3.64 | 6.74 | 3.00 | 4.75 |
| Industrial and Commercial Bank of China (Malaysia) Berhad | 3.77 | 5.70 | 3.00 | 3.97 |
| Malayan Banking Berhad | 3.00 | 6.65 | 3.00 | 4.15 |
| OCBC Bank (Malaysia) Berhad | 3.83 | 6.76 | 3.00 | 4.70 |
| Public Bank Berhad | 3.52 | 6.72 | 3.00 | 4.35 |
| RHB Bank Berhad | 3.75 | 6.70 | 3.00 | 4.75 |
| Standard Chartered Bank Malaysia Berhad | 3.52 | 6.70 | 3.00 | 4.75 |
| United Overseas Bank (Malaysia) Bhd | 3.86 | 6.82 | 3.00 | 4.61 |
Borrowers should also understand that their monthly repayment amount will increase or decrease when there is a change in the OPR. As such, they will need to plan ahead and assess whether they can continue to afford the loan repayments if the effective lending rate increases in the future.
Overall, the SBR system may actually benefit customers more in the long run. It is a more transparent reference rate. Prospective borrowers can make better money choices when it comes to navigating an array of loan products offered by various financial institutions.
