BSP to continue gradual RRR reduction

Published November 22, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The banking industry can expect a more gradual easing of reserves requirement ratio (RRR) after the “rapid fire” reduction from 18 percent to 14 percent this year, the Bangko Sentral ng Pilipinas’s (BSP) highest-ranking official said.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)
Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno. (Bloomberg photo)

BSP Governor Benjamin E. Diokno said he and the Monetary Board still has three and a half years to bring the RRR to single-digit levels. But when asked if the BSP will mirror this year’s 400 basis points (bps) RRR cut for 2020, he said that is not a possibility.

“(There will be) risks in the quality of lending,” he said, if the RRR is reduced to single-digit levels too fast. He cited as example the credit crisis in the US in 2008 where he described the loan market as “too loose”.

“We try to evaluate the situation and we’re evaluating the quality of lending of the industry,” said Diokno.

He said that as the economy expands and grows further, with the completion of the infrastructure projects which will link provinces, the demand for more housing, residential developments and new communities will also grow, and so is the required funding for these expansion.

Diokno is hoping that it will be the small scale industries which will increase borrowings as the banks release more liquidity into the financial system because of the RRR cuts.

As to when the BSP will reduce the RRR again, the BSP chief said: “I’m not going to give you some dates but I’ll give you an idea … I’ve said that at the end of my term it could be single digit, it could be nine percent. We’re at 14 percent now, so that’s almost four years to go (to reduce to single-digit).”
Diokno’s term as BSP’s fifth governor will end in June 2023.

The International Monetary Fund (IMF), in concluding its recent Article IV assessment of the Philippines, agreed with a gradual RRR reduction.

IMF Mission Chief Thomas Helbling said that RRR is no longer considered a significant monetary tool and agreed with the BSP that it is more of an operational adjustment.

The BSP has said that the RRR cuts serve its broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs. The adjustment also ensures sufficient domestic liquidity in support of economic activity, it said.

The BSP has cut interest rates three times for a total 75 bps this year. The first rates’ reduction was on May 9, followed by another on August 8 and the last one on September 26.

As for RRR, which the BSP views as an operational adjustment, the Monetary Board on May 23 decided to slash 200 bps off the RRR in three phases or until July 28.

A day after reducing key rates, the BSP again cut RRR by 100 bps on September 27, effective in November. After announcing that they will trim the RRR again in December, the Monetary Board made good on its promise last October 24 to drop another 100 bps off the RRR – for a total 400 bps reduction for 2019.