Banks lend out a total of P254 billion for micro, small and medium enterprises (MSMEs) in 2022 as alternative compliance to the reserve requirements (RR) rule.
As part of Bangko Sentral ng Pilipinas (BSP) pandemic relief measures, banks were allowed to use loans to MSMEs as RR compliance which culminated in the week ending on Dec. 29 last year.
The 2022 MSME loans as alternative compliance to the RR was 7.7 percent higher compared end-2021’s P235.8 billion. The MSME loans accounted for 15.3 percent the total required reserves for the covered reserve week.
The relief measure was first implemented on April 24, 2020 for MSMEs. The BSP expanded this by May 29 of the same year to include large enterprises that are not affiliated with conglomerates. The aggregate limit for MSME loans was P300 billion and P425 billion for large enterprises.
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, or where available through reserve-eligible government securities.
The BSP had planned to reduce the RR ratio – currently at 12 percent for big banks -- before the expiration of the relief measure.
However according to BSP Governor Felipe M. Medalla, an RR ratio cut will confuse the market since the Monetary Board is not done yet in its rate hikes. Since May 2022, the BSP has raised its key overnight rate by a cumulative 350 basis points (bps).
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.
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.
Meanwhile, Medalla said that as BSP chief, he has authority from the Monetary Board to reduce the RR ratio by 200 bps. He has said that they may cut the ratio within the first six months of 2023.
Since BSP has been gradually exiting from its pandemic-related monetary accommodation, BSP’s liquidity-mopping operations are now being geared towards increased liquidity absorption.
The BSP has exited from other previous liquidity provisions including measures such as national government advances and purchases in the secondary market for government securities.
As such, the BSP has prepared its monetary operations to absorb more excess liquidity and offset any potential increase money supply so these do not become inflationary.
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.