KUALA LUMPUR (Oct 10): Banks and credit service providers with significant hire-purchase exposure will be the hardest hit by a new ruling that abolishes the use of flat rates and the Rule of 78 for loans, according to MBSB Research.

The house cited companies such as AEON Credit (KL:AEONCR) and ELK-Desa Resources Bhd (KL:ELKDESA) as the non-bank lenders.

Meanwhile, it noted Affin Bank Bhd (KL:AFFIN) has the highest percentage of hire purchase exposure at 22.5%, followed by Public Bank Bhd (KL:PBBANK) 18.5%, Malayan Banking Bhd (KL:MAYBANK) 13.1%, Hong Leong Bank Bhd (KL:HLBANK) 11.5%, and AMMB Holdings Bhd 7.9% (KL:AMBANK).

This follows the Dewan Rakyat's passage of the Hire Purchase (Amendment) Bill 2025, which abolishes the "Rule of 78" for fixed-rate loans.

The Rule of 78 is an interest calculation method that benefits lenders by front-loading interest payments.

This practice has historically limited the savings borrowers could achieve by repaying their loans early.

While the new ruling is a positive development for consumers, ensuring fairer monthly instalment calculations, it directly challenges a profitable lending model for certain finance companies.

The immediate financial impact will stem from lesser interest income from early repayments, however negligible it may initially seem.

Nonetheless, for the broader banking sector, the overall impact will be immaterial.

Further, it noted a potential silver lining, as early repayments are better for overall asset quality due to the higher likelihood of full recovery.

Additionaly, a fairer system could theoretically speed up the car replacement cycle, stimulating future demand for new auto loans.

Currently, roughly 30% of hire purchase borrowers settle their loans early, though a very small proportion do so within the first five years when interest charges are highest.

"Also, keep in mind that the new ruling applies to new loans — though we do not discount the possibility of banks providing some form of discount/assistance to pre-existing borrowers," said MBSB.

This legislative change dovetails with a broader regulatory push from Bank Negara Malaysia (BNM).

BNM has concurrently proposed abolishing the Rule of 78 for personal financing products in a recently released policy document.

This parallel move will extend the impact to other credit service providers, notably those like RCE Capital Bhd (KL:RCECAP) with significant personal financing exposure.

Meanwhile, among banks, MBSB Bhd (KL:MBSB) has the highest exposure at 43.5%, followed by Bank Islam Malaysia Bhd (BIMB) at 30.3% and Alliance Bank Malaysia Bhd (ABMB) at 10.5%. 

These regulatory changes align with the Consumer Credit Oversight Board's (CCOB) broader mission to curb predatory lending, an effort that will disproportionately affect non-bank lenders with new restrictions on recovery methods and financing charges. 

MBSB said while this paves the way for a "Twin Peaks" regulatory model and enhances consumer protection, the impact on Malaysian banks is expected to be minimal, as the CCOB's focus has consistently targeted the non-bank credit sector.