BNM Should Abolish Rule 78!

The move to abolish the Rule of 78 method which calculates interest on personal financing is seen as positive. It aims to promote a healthier financial environment for borrowers. Rule 78 calculates a loan’s interest for the entire loan term based on the original principal. This also means that borrowers who pay off their loans earlier than the term stated do not get a better deal on interest savings. 

Bank Negara has proposed to abolish Rule 78 using an exposure draft while inviting feedback from the public. Under the new proposal, Bank Negara said it will prohibit financial services providers (FSP) from using Rule 78 in personal financial products. They may, however, offer fixed rates or a floating rate or where interest is charged on the remaining principal balance after deducting payments made by the borrower. 

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It added that personal financing will only be granted when a borrower provides a verbal or written acceptance of the offer, and the FSP is satisfied that the borrower has the means to repay based on the affordability assessment. 

Bank Negara also said it will become an FSP’s responsibility to inform borrowers on how interest is calculated, including whether it is on a daily or monthly reducing balance basis. 

Additionally, the central bank said it invites feedback on the feasibility of reducing the existing maximum tenure of 10 years for personal financing products. The central bank acknowledged that in countries such as Australia and Singapore, the maximum tenure is up to seven years. 

Meanwhile, The Association of Banks in Malaysia (ABM) said they will continue working with member banks as well as with Bank Negara to effectively implement any changes based on the final policy document on personal financing to be issued in the future, while addressing any operational details along the way. 

This, Rule 78, has been an unfair measure to consumers. We have very weak consumer activism. And BNM moves slowly not to upset the banks. It is the same with insurers, BNM was slow to respond to consumers grouses on insurance premiums for medical cover. If you look at the documents that a borrower or guarantor has to execute for a loan, it is phenomenal. Then for retail/consumer loans, banks will not budge on terms. They will say, these are standard terms and blame it on BNM or ABM! Why can’t we have a more equitable lending environment especially where banks are making billions in profit at the expense of the consumer and bank worker?

 

Reference:

Move to abolish Rule 78 timely, Lydia Nathan, The Star, 18 December 2024