Mortgage rates have fallen significantly in recent weeks as banks jostled for market share in a market segment seen as having lower risk. And this is more so during a recession.

In some cases, some banks have even offered rates at base lending rate (BLR) minus 6.75%, or a minimum rate of 0% for the first year of the loans.

The aggressive slashing of mortgage rates has prompted Irene Dorner, CEO of HSBC Bank Malaysia Bhd, and Malayan Banking Bhd president and CEO Datuk Seri Abdul Wahid Omar, to comment last Monday that banks are lending too cheaply. Wahid was quoted as saying in news reports that rates have fallen to below “economic levels”.

We hope that this will not be the start of banks becoming more synchronised when they set their lending rates.

Of course, banks will be in for some lean times ahead; we are in a recession, after all. When the economy is booming, interest rates soar to astronomical levels and banks make huge profits from the good margins. And because the times were good, complaints from borrowers weren’t as loud. For sure, we don’t hear banks talking about interest rates being too high.

When a downturn comes, banks must do what they need to do to protect their bottom line, and this must include ensuring that borrowers continue to borrow by making loans affordable. If competition focuses on one particular segment, then the best bank wins.

For sure, lending rates have come down, in tandem with the aggressive cuts in Bank Negara Malaysia’s overnight policy rate (OPR) since November last year. Today, the OPR stands at 2%, and base lending rates of banks have come down to average 5.5% to reflect this.

But it must also be remembered that it is not just the lending rates that have come down. Fixed deposit (FD) rates have also fallen quite significantly to around 2% to 2.50% for almost all tenures, and as for the savings rate, it is so low at less than 1% that the man-in-the-street these days doesn’t even talk about it anymore.

Banks have access to various sources of funds — not just from deposits but also from the interbank market. In this regard, banks with a huge network of branches will have an advantage because their deposit base will be bigger.

One would like to think that the reason some banks can afford to be more aggressive in cutting their mortgage rates is because they can do so without impairing their health. For one, the big cuts are not applicable throughout the tenure of the loan. It is short term, because at some point, when the economy improves, the rates go up to profitable levels again.

And a reason why banks offer very attractive rates in the first couple of years is that they want to draw and lock-in the customer in a segment that has low risk, thereby building a bigger customer base.

So, it is up to the banks to make an economic decision on how low rates can go. Perhaps those who offer zero rates can do so because they are more cost efficient, and they know how to make use of the other banking operations to offset the squeeze in margins from lower mortgage rates. For instance, this can be from treasury operations, which a banker says can contribute up to between 30% and 35% to a bank’s profits.

It must be noted that Bank Negara Malaysia’s supervisory oversight of the sector is also very stringent. Furthermore, there are requirements that banks must meet, including those under Basel 2, and these include putting in place a good risk management system and a good risk-weighted capital adequacy ratio.

And, surely, banks themselves are responsible enough to know what the limit is; this is more so when they only need to look at the US banking crisis to know what not to do.

Competition is good. It is when there is competition that corporations become efficient. They have to be if they want to survive. In the process, consumers benefit because they will have more choices, and cheaper choices.

But it is when banks start talking about too much undercutting in an environment of increasing liberalisation that we should be worried. We do not want to see cartel-like agreements among banks insofar as lending rates are concerned. Already, the Association of Hire Purchase Companies Malaysia appears to have become more “coordinated” in setting the hire purchase (HP) rates, and this is not good.

From the perspective of the borrowers, there is no such thing as lending being too cheap, and because it is a free market, at least as free as it can get, he will go to the bank that offers him the best deal.  And this, we say, is great indeed.



This article appeared in Corporate page, The Edge Malaysia, Issue 755, May 18-24, 2009