The change, it said in a note today, would not apply retrospectively and banks are expected to keep the effective interest rate (EIR) unchanged.
As the banks are already recognising interest income from hire purchase using the EIR method, the change’s impact should be neutral assuming the EIR remains the same should there be any amendments to the Hire Purchase Act 1967, RHB Research added.
“Banks currently also maintain the repayment schedule based on Rule 78.
“For early settlement cases, adjustments will be needed to calculate the balance differences between the Rule 78 and EIR calculations,” it said.
According to a media report yesterday, the Consumer Credit Oversight Board Task Force has proposed a change in the method of interest calculation for hire purchase to reducing balance from Rule 78 as part of efforts to modernise the Hire Purchase Act.
Other proposed changes included the acceptance of digital and electronic signatures for Hire Purchase agreement processes.
Under Rule 78, interest is computed upfront based on the total principal, and does not take into account the reduction in principal outstanding after each repayment the borrower makes.
Hence, borrowers pay a greater portion of interest in the earlier period of the loan tenure and those that opt for early settlement will be faced with a higher principal amount outstanding, compared to other methods of calculating interest payments.
As such, this method is expected to be replaced with the more conventional reducing balance method.
RHB Research said the proposed change will only apply to new hire purchase contracts signed after the relevant changes are made to the Hire Purchase Act.
“Existing borrowers will continue to be bound by their existing hire purchase contracts,” it said.
Assuming that banks transition to a floating rate method after the change, this would raise their rate leverage and mitigate potential modification losses should there be another loan moratorium programme similar to the one in 2020, it added.
Hence, the research house has maintained an “overweight” call for the banking sector with Maybank, CIMB and Hong Leong Bank as the top picks.