Banks’ loans as alternative compliance to the reserve requirement (RR) amounted to P295.3 billion as of mid-November 2022, up by 23.35 percent from same period in 2021 of P239.4 billion, based on Bangko Sentral ng Pilipinas (BSP) data.

The RR-compliant loans are part of BSP’s pandemic-related relief measures implemented since April 2020. The policy was first issued on April 24, 2020 for micro, small and medium enterprises (MSMEs) and May 29 of the same year for large enterprises expired last Dec. 29. The BSP has yet to release the figure for December, the last month for the granting of RR-compliant loans.

Of the P295.3 billion, P232.4 billion loans went to MSMEs while P62.9 billion were borrowed by eligible large enterprises. This was higher compared to same period in 2021 of P202.2 billion for MSME loans and P37.2 billion for big companies.

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 RR rules. Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP which they cannot lend out.

The aggregate limits are P300 billion for MSMEs and P425 billion for large enterprises.

The MSME loans accounted for 14.5 percent the total required reserves for the covered reserve week while loans to large enterprises accounted for 3.9 percent

RR ratio is currently at 12 percent for big banks and 14 percent for non-banks with quasi banking functions. Thrift banks have three percent reserves ratio while rural banks have two percent.

The BSP had intended to reduce the RR ratio before the expiration of the relief measure but with high inflation which had to be dealt with by tightening monetary policy, an RR ratio cut will have the opposite desired effect.

BSP Governor Felipe M. Medalla said on Dec. 20 that the planned reduction in the RR ratio will likely be implemented within the first six months of 2023 when inflation decelerates closer to the target of two percent to four percent. As of end-November, the average inflation rate stood at 5.6 percent.

Medalla said that to avoid confusing the market, the RR ratio cut has to wait after the BSP has paused its rate hikes. He has already signalled to the market that there could be at least two rate increases in the first two policy meetings this quarter.

To address the excess liquidity that will be released after Dec. 29, the BSP allowed trust units of banks or stand-alone trust companies to buy BSP securities in the secondary market.

As the relief measure winds down, the move improves BSP’s ability to control money supply through their open market facilities in particular through the issuance of the 28-day bills.

As for the inflation, the BSP said this could peak to as much as 8.6 percent for the month of December. However, inflation is expected to slow down in the next months after its end-2022 peak due to several factors including negative base effects, the easing global oil and non-oil prices, and the impact of BSP’s 350 basis points cumulative policy rate adjustments last year.

Medalla said he expects inflation path to return to within the target range by the third quarter this year and will approach the lower end of the range by the mid-2024. Meantime, the risks to the inflation outlook continue to be on the upside for 2023 but remains broadly balanced next year.