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Expect more denials as banks are more cautious when accepting vehicle loans with OPRs increasing to 2.25 percent.

· Industry Updates

 An article by Berita Harian claims that banks are now being more selective when accepting automobile loans. The recent decision by Bank Negara Malaysia to increase the overnight policy rate (OPR) by 0.25 percent to 2.25 percent on July 6, 2022, is in response to this.

This is the second time the OPR has been increased this year; the first increase, also by 0.25 percent to 2 percent, was announced on May 11, 2022. Prior to that, the OPR was maintained between July 7, 2020, and March 3, 2022, at a historically low 1.75 percent in order to boost the economy as the country struggled with the Covid-19 problem.

On July 6, 2022, the Malaysian central bank also revealed that year-to-date headline inflation has averaged 2.4 percent; the inflation rate is anticipated to stay within the year's expected range of 2.2 percent to 3.2 percent.

According to historical data analysed by RHB Investment Bank analyst Jim Lim Khai Xhiang, the average acceptance rate for auto loans was 60% when the OPR, which affects a bank's borrowing interest rate, was at 2% between February 2009 and February 2010. He continued by saying that between May 2011 and June 2014, when the OPR was raised to 3 percent, the ratio even further decreased to 51 percent.

If the OPR is raised much more, according to Lim, hire purchase rates will probably follow suit, making it more expensive and challenging for clients looking for a car loan. "As a result, we think banks will be more cautious when approving hire purchase transactions. Low approval rates for hire purchase loans could arise from this, he said.

He continued by saying that growing inflation might further reduce consumers' purchasing power, which might become even more terrible if the government took action to reform subsidies. "In our view, since buying a car is a decision made solely based on discretion, consumers who are more price sensitive may be more tempted to postpone non-essential purchases when faced with growing cost of living and higher vehicle prices," Lim said.