KUALA LUMPUR (Jan 7): Alliance Bank Malaysia Bhd (KL:ABMB) sees insignificant impact towards its profit and loss (P&L), should the banking sector moves away from the “Rule of 78” method for calculating interest on personal financing.
At the official integration of Alliance Bank Visa Credit Cards with Samsung Pay and Google Pay, Alliance Bank group chief executive officer Kellee Kam told The Edge what matters to the bank’s P&L instead would be the adjustment to its effective interest rate.
“This [pivot] is less of an issue than what most people will think; the impact of moving away from Rule of 78 is not going to be significant to P&L,” Kam said.
Kam also acknowledged there could be price changes to financing products should this pivot happen, but the margin of the products is what will ultimately dictate the P&L of banks.
“Margins will be market-driven,” he said.
On Dec 16, Bank Negara Malaysia (BNM) proposed for the removal of the Rule of 78 method for calculating interest on personal financing, and for certain home financing products to be treated as personal financing products with a maximum 10-year tenure cap, to prevent penalising early re-payers.
Under BNM’s new proposal, financial services providers (FSPs) will be prohibited from offering personal financing where interest is calculated using a flat rate with the Rule of 78 method.
However, FSPs may offer personal financing with either a fixed or floating rate, or where interest is charged on the remaining principal balance after deducting payments made towards the principal.
Rule of 78 benefits banks in the short term by ensuring they collect more interest upfront, and it discourages early loan repayments, as borrowers stand to save little on interest if they settle their loans early.
According to the banking sector note published by Phillip Capital on Dec 18, banks may look to raise their effective interest rates, which could offset some of the lost interest.
The research outfit also said Alliance Bank has the highest exposure to personal financing at 11%, compared to other banking peers whose exposure ranged between 2% and 6%.
Shares of Alliance Bank closed seven sen or 1.4% higher at RM5.09, giving the bank a market capitalisation of RM7.88 billion. Since Jan 2, 2024, the bank’s share price has gained 51%.