What the OPR means for your borrowing costs

When the Overnight Policy Rate moves, almost all the coverage that follows is about house buyers. The effect on a business term loan or an overdraft gets a line at the end, and it is usually either wrong or too vague to use. The mechanics are not complicated, and they are worth learning once, because they barely change from year to year even though the numbers do.

What the OPR is

The Overnight Policy Rate is the benchmark interest rate for Malaysia, set by Bank Negara Malaysia. It is the rate the central bank targets for banks lending to each other overnight in the domestic money market, and it is the anchor underneath nearly every other ringgit interest rate in the country.

It is decided by the Monetary Policy Committee, a committee within Bank Negara, which meets on a schedule published in advance, the number of scheduled MPC meetings a year, to be confirmed against BNM’s published schedule times a year. After each meeting BNM issues a monetary policy statement saying whether the rate has changed and explaining the reasoning. Between those meetings the rate does not move.

Where it stands now

As at the as-at date for this edition:

A basis point is one hundredth of a percentage point, so a 25 basis point move is a quarter of one per cent.

How the OPR reaches your facility

It does not reach you directly. It moves a reference rate, and your facility is priced as that reference rate plus a spread. Three reference rates are in circulation in Malaysia, and which one applies to you is written in your letter of offer.

• The Standardised Base Rate, or SBR. Under Bank Negara’s reference rate framework the SBR is set equal to the OPR itself. If the OPR moves 25 basis points, the SBR moves 25 basis points, at every bank, with no discretion anywhere. It applies to the scope of the SBR framework, including which facilities and from what date, to be confirmed against BNM’s reference rate policy document.
• The Base Rate, or BR. A bank’s own base rate, built from its benchmark cost of funds and the cost of holding statutory reserves. It normally moves when the OPR moves, but each bank sets its own, so the size and the timing of the change can differ from one bank to the next.
• The Base Lending Rate and Base Financing Rate, BLR and BFR. The older benchmarks, still quoted on legacy facilities and, at some banks, on business facilities. Banks revise them after an OPR decision.

This distinction matters more for an SME than for a homeowner, because business facilities are not always priced off the same reference rate as a housing loan. Confirmation of which reference rates currently apply to SME facilities at the banks and DFIs SMEBox submits to. Rather than assuming, read the pricing clause in your own letter of offer and find the name of the rate.

The spread is the part that is about you

Your effective rate is the reference rate plus a spread, sometimes called a margin. If the letter of offer says the reference rate plus an indicative spread quoted by banks on SME facilities, to be supplied and clearly attributed to banks, the first half is the economy and the second half is the bank’s view of your business.

The spread is set when the facility is approved and, on most facilities, stays fixed for the life of it. What goes into it:

• the internal risk grade the bank has assigned your company
• the security behind the facility, and whether that is property, a fixed deposit, a debenture or nothing at all
• the facility type and the tenure, since an overdraft, a term loan and a trade line are not priced alike
• your conduct history, particularly the current account and what CCRIS shows on your existing facilities
• the sector you trade in, and how that bank currently views it
• whether a guarantee from Credit Guarantee Corporation or SJPP sits behind part of the exposure

That list is the useful one, because every item on it can be worked on before an application. The OPR is out of everyone’s hands.

What a rate change does to a floating facility you already have

If your facility floats, the reference rate moves and your effective rate moves with it. What happens next depends on the facility.

On a term loan with a fixed monthly instalment, the bank has two ways to absorb a change. It can hold the instalment and adjust the remaining tenure, or hold the tenure and adjust the instalment. Which one it does is set out in your letter of offer, and banks differ. If the instalment is being held steady after a rate rise, the increase has not gone away; it is being paid in extra months at the end.

An overdraft has no instalment. Interest is charged on the balance you actually draw, so a rate change shows up in the interest debited at the end of the month, and only in proportion to how much of the limit you were using. The same applies to most revolving working capital lines, which is one reason a business running a low average utilisation feels a rate move far less than the headline suggests.

Banks are generally required to notify borrowers of a change in the reference rate, and the notice period is stated in the facility agreement, commonly the usual notice period for a reference rate change, to be confirmed. Notices go to the registered address held on file, which is a practical reason to keep your address at SSM current.

Fixed-rate facilities are a different case

Not every business facility floats. Hire purchase for vehicles and machinery is normally written at a fixed rate for the whole term, so an OPR decision after signing changes nothing for that agreement, in either direction. That cuts both ways, and it is the reason a business can be carrying an expensive hire purchase agreement well after rates have fallen.

Islamic facilities need separate wording, because the terminology causes real confusion. A variable-rate Islamic facility is often written with a ceiling profit rate, which is a contractual maximum, and an effective profit rate, which is what you actually pay. The effective rate tracks the reference rate; the ceiling does not move. Where the effective rate sits below the ceiling, the difference is given back as a rebate, known as ibra’. Seeing the ceiling rate on a document and assuming that is what is being charged is a common and entirely unnecessary fright.

If you are about to apply

The rate you are offered is built from the reference rate on the day the facility is priced, plus the spread agreed then. A cut that happened last month is already inside the reference rate; it is not a discount still waiting to be claimed. Banks do not usually reprice an application that is already in progress, and the letter of offer states the basis that applies.

Two things are worth knowing. First, the affordability assessment a bank runs is often stressed above the current rate, so a facility can be sized on a rate higher than the one you would actually pay. Second, in our experience the difference between a well-prepared file and a poorly prepared one shows up in the spread, and that difference is usually larger than a single rate decision. Waiting for the next MPC meeting rarely changes the arithmetic by as much as fixing what is weak in the application.

Working out the effect on your own repayments

1. Find the pricing clause in your letter of offer. Note two things: the name of the reference rate, and the spread.
2. Take the new level of that reference rate. For an SBR-linked facility, that is simply the new OPR. For a BR, BLR or BFR linked facility, the bank publishes its own revised rate, usually within days of the decision.
3. Add your spread to get the new effective rate.
4. Take the outstanding balance and the remaining tenure from your most recent statement, not the original loan amount and the original tenure. Using the original figures is the most common mistake here and it overstates the effect considerably.
5. Put the balance, the remaining months and the new rate into the repayment calculator on our tools page, then run it again at the old rate and compare.

The answer is an estimate. A bank’s own calculation can differ slightly because of day count conventions, the rest period and the point in the month at which the change takes effect. As an illustration, on an outstanding balance of an illustrative outstanding balance in ringgit with an illustrative remaining tenure to run, a size of the rate change in basis points change works out at roughly the resulting change in the monthly instalment, calculated not estimated a month.

If the number you arrive at is uncomfortable, that is worth knowing before the next rate decision rather than after it, and restructuring an existing facility is a conversation banks will have. Where your sector sits in the banks’ current thinking is covered in where bank appetite sits this quarter, and you can always put the question to us with your letter of offer in front of you.

Common questions

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