By means of Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) plans to “substantially” reduce the reserve requirement ratio (RRR).ly” this year, the top official said.
“We are considering it. We discussed the timing of it. I would say it will happen this year,” BSP Governor Eli M. Remolona Jr. said in a press call on Wednesday.
“We will reduce reserve requirements substantially this year and further reductions may occur next year,” he added.
The RRR is the part of reserves that banks must hold instead of lending.
The BSP reduced the ratio for large banks and non-bank financial institutions with quasi-banking functions by 250 basis points to 9.5% in June 2023.
It also reduced the ratio for digital banks by 200 basis points to 6% and by 100 basis points for thrift banks, and rural and cooperative banks to 2% and 1% respectively.
The central bank has since cut the RRR for universal and commercial banks to a single-digit level, from a high of 20% in 2018.
“The banks want a reduction in the reserve requirement and they say, ‘If you reduce it, we will do something else for you’, for example reducing the transaction costs for payments,” Mr Remolona said.
“We try to control that. But the idea is to substantially reduce reserve requirements,” he added.
The BSP governor earlier said that they aim to reduce the RRR to just 5%.
Meanwhile, Mr Remolona said the impact of the RRR cuts on the economy will not be immediate.
“Our transmission mechanism has long delays. This is partly because the markets are not deep and liquid. We are taking these delays into account,” he said.
“At the same time, we are trying to improve the liquidity of the markets to shorten these delays. But that’s an eFThat will take some time.”
BSP Assistant Governor Zeno R. Abenoja said lowering the RRR could boost credit and economic growth.
“We hope that additional liquidity will be deployed to help expand productive economic activities. However, that will take time,” he said.
“Some of it will therefore be used by banks in different countries Ffinancial markets, including government bonds and stocks, but some of it may still remain in their accounts, including returning it to the BSP.”
The RRR cuts in June last year coincided with the expiration of the BSP’s pandemic support measures, which allowed banks to count their loans to small businesses as part of their reserve requirement compliance for deposit liabilities and replacement bonds.
“In terms of liquidity, the reserves for the reserve requirement on our balance sheet are on the same side, on the liabilities side. So if we reduce the reserve requirement, that part will decrease and we want to compensate for that,” said Mr Remolona.
“So that’s more liquidity for the banking system and we want to offset that by absorbing back some of that liquidity, which will go to another part of our balance sheet,” he added.
The BSP chief earlier said the Philippines’ current RRR is among the highest in Asia. He also said reserve requirements are “driving a wedge” between deposit rates and lending rates.
When a bank has to maintain a lower reserve ratio, it has more money to lend to borrowers. This increases the bank’s lending capacity, impacting its ability to support economic growth and meet the credit needs of individuals and businesses.