BSP to cut reserves ratio in Dec.


The Bangko Sentral ng Pilipinas (BSP) will likely reduce banks’ reserve requirement ratio (RRR) in December, not earlier, according to BSP Governor Felipe M. Medalla.

Earlier, both Medalla and former central bank chief and now Finance Secretary Benjamin E. Diokno said the RRR cut will happen either October or November. However, Medalla said it may happen on the month when the reserves eligibility relief measure expires which is on Dec. 31.

BSP building and logo/Reuters

“We will have a cut in RRR that offsets the cessation of the reserve eligibility,” said Medalla.

The expiration of the relief measure which allowed banks to use loans to micro, small and medium enterprises (MSMEs) and large enterprises that are not affiliated with conglomerates as alternative compliance with the reserve requirement is a tightening of monetary policy stance.

When this reserves eligibility measure expires, the BSP has to reduce the RRR a month ahead or at the same time.

“We are still deciding if right before or simultaneous. The point is we don’t necessarily want to tighten because letting it expire without doing anything is a tightening,” said Medalla. But, the BSP chief said the market should not read the RRR cut as a monetary policy. “It’s just a compensation for a getting rid of a relief,” he added.

Meanwhile, the Monetary Board also considered another solution which is to extend the relief measure after Dec. 31. But this option is considered off the table.

Banks’ loans as alternative compliance to the reserve requirement amounted to P277.6 billion as of mid-June, unchanged compared to the previous month’s P277.8 billion. There was no data that could compare it to 2021 numbers.

Of the P277.6 billion, P211.4 billion are loans to MSMEs while P66.2 billion are borrowed by eligible large enterprises.

The RR-compliant loans are part of BSP’s pandemic-related relief measures implemented since April 2020.

As part of pandemic response, the central bank allowed banks to use loans to MSMEs and large enterprises that are not affiliated with conglomerates as alternative compliance with the reserve requirement. The aggregate limits for MSME loans is P300 billion and P425 billion for large enterprises.

Not all banks are availing of the relief measure and once it expires by end-2022, the BSP intends to cut the RRR currently at 12 percent for big banks and 14 percent for non-banks with quasi banking functions. Thrift banks have three percent reserve ratio while rural banks have two percent.

Since a lower RR ratio reduces intermediation costs, the BSP wants to reduce the ratio to single-digit levels by 2023.

The BSP’s primary monetary policy instrument is the interest rate on its reverse repurchase facility. But BSP has the option to reduce banks’ reserve requirements to control inflation and to siphon off liquidity via its weekly auctions of securities and term deposits.