Yesterday, on the 3rd of November, Bank Negara Malaysia (BNM) made the latest change to the Overnight Policy Rate (OPR) by increasing 25 basis points, from 2.50% to 2.75%.

The increase in OPR has a ripple effect that affects the interest rates across different kinds of banking services within Malaysia, such as lending, financing and deposit rates, as the OPR is part of BNM’s monetary policy which ascertains the interest rates for financial institutions (FI) that lend each other money overnight.  

The OPR is determined by the overall outlook of the Malaysian economy, and BNM will fine-tune the rate according to the desired amount of money in circulation and savings.

How Does OPR Affect Malaysian Banks’ Financial Products?

When the OPR rates are lowered, banks’ financial services interests will follow suit, resulting in banks being less wary when it comes to lending. Case in point: in May 2019, BNM lowered the OPR from 3.25% to 3%, leading to a 13% increase in Malaysian banks’ loan approval rate. During the COVID-19 pandemic, the OPR was brought to an all-time low, 1.75%, to help stimulate the economy by encouraging lending from the banks, and spending from the general public. 

Now, in the inverse, higher OPR rates would translate to higher interest, meaning that banks will be more cautious when approving loans. Whereas for existing loans, banks will either increase monthly loan repayments or the loan tenure. On a brighter note, the higher interest rate applies to many other banking services as well, including fixed deposit interests and saving interests, meaning that one will get higher returns on their savings, so all is not lost.

An Example of Affected Financial Products

When it comes to housing loans, the OPR is the underlying influencer of a bank’s Standardised Base Rate (SBR), Base Rate (BR), and Base Lending Rate (BLR).

Now, one might ask, why are there so many different rates? Well, the SBR is the latest Reference Rate Framework introduced by BNM to replace the BR for new retail floating-rate loans in Malaysia including housing loans and personal financing, starting on the 1st of August 2022. On the other hand, the BR was introduced on the 2nd of January 2015 to replace the BLR. All these changes were put in place so that the banks will all eventually use the same rate, the SBR, which moves in tandem with the OPR, promoting transparency and healthy competition among banks, while making it easier for consumers to make informed decisions when applying for new retail-floating rate loans in Malaysia. 

It is important to note that banks are using all of the rates mentioned above, as there are ongoing loans that use the older rates as they were created before the newer rates were introduced. 

Challenges Faced by Financial Institutions (FI) with Ever-changing OPRs

There are several challenges banks in Malaysia face due to constant changes in the OPRs. 

• Agility in adapting to fluctuating interest rates

Banks within Malaysia have to adapt their financial services and products by adjusting their SBR, BR, and BLR in accordance with the OPR determined by BNM, even though all of the aforementioned rates differ from each other. One can only imagine the amount of work that is required, and how this requires a technological ecosystem to keep up with the changes. 

• Digitisation of banking business processes

The loan origination process is rather complex, lengthy and time-consuming, as it involves other parties besides the borrower and lender. When the COVID-19 pandemic hit, the resiliency of major FIs was put to the test, as online lenders could produce results within days if not hours. At the same time, traditional FIs were left to figure out how they could match the speed of their technologically savvy counterparts.

• An increase in non-performing loans (NPLs)

UCSI University Malaysia assistant professor in finance Liew Chee Yoong, and OCBC Bank (M) Bhd country chief risk officer Thor Boon Lee, expect NPLs to rise this year. The more OPR rates increase, the more expensive it is to borrow monies because the interest rates across banking services will increase accordingly, reducing the affordability of loans. The risk of higher loan defaults puts further pressure on the profitability of banks, as banks need to hire debt-collection agencies, while also writing-off NPLs. 

• Unified data management

As mentioned above, lending is a laborious process involving a lot of paperwork. For example, every loan or mortgage application would require the processing of multiple documents, such as salary slips, identification, employment contracts, and so on. Moreover, FIs would need to conduct validation and credit evaluation, sometimes through ancillary services. After that, FIs would need to conduct risk analysis and pricing, followed by underwriting the loan through compliance management and documentation. The last step involves closing, which finalises the loan agreement with the customer. This process is proliferated according to the volume of applications.

JurisTech, Your Preferred Partner

Here at JurisTech, we pride ourselves in our solutions that enable FIs to stay ahead of the game, regardless of complications. 

• Juris Origination is an end-to-end loan origination software that is capable of keeping up with the OPR changes by updating all of your financial products via scoring rules, offering you peace of mind when the OPR changes in the future. 
• Juris Collect is an enterprise debt-collection software that unifies your FI with debt-collection agencies and firms, all within a single platform, while also being capable of organising and forecasting the next steps in accordance with customers’ behaviour. 

If any of these solutions draws interest and excitement from your end, feel free to contact us at contact@juristech.net. We are happy to have you on board. 

About JurisTech

JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.