Banks’ loans to micro, small and medium enterprises (MSMEs) as alternative compliance with the reserve requirements (RR) totaled P236.9 billion as of end-April this year, up 11.3 percent compared to same period last year of P212.8 billion. Based on Bangko Sentral ng Pilipinas (BSP) data, for the reserve week ending on April 27, RR-compliant MSME loans accounted for 14.1 percent of the required reserves during the period. This was moderately higher than the previous year’s MSME loans for compliance with the RR which accounted for 13.6 percent of total required reserves. The BSP has extended until June 30, 2023 the RR-compliant MSME loans which is a pandemic relief measure, to enable banks to help more MSMEs receive financing. The relief measure expired last Dec. 30, 2022. It was renewed for the third time by the BSP since the regulatory reprieve was implemented in April 2020. 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. With the continued recovery in the economy, the BSP has started to wind down the relief measures implemented during the Covid-19 crisis except for those that encourage lending to MSMEs. The MSME sector is about 99.5 percent of the total business establishments operating in the country. Aside from the extension of RR-compliant loans, the other relief measure that was extended until end-June this year was the reduced credit risk weight of loans granted to MSMEs. The BSP reduced to 50 percent from 75 percent the credit risk weight of MSME loans for diversified MSME portfolio with at least 500 borrowers over a number of industries, and 100 percent for non-diversified MSME portfolio. BSP Governor Felipe M. Medalla said on May 18 that if or when the RR-compliant lending is phased out on June 30, they should be prepared to reduce RR ratio at the same time. The expectation is that BSP will cut RR ratio by 200 basis points (bps), or from 12 percent to 10 percent, on or before June 30 to offset the impact of winding down relief measures. Medalla has said that if they decide not to extend the relief measure, they must offset it by an RR reduction. “If cutting RR is not enough, the BSP will just increase its borrowings to offset the effects of adjusted money supply,” he said. The BSP has the option to reduce banks’ RR to control inflation and to siphon off liquidity via its weekly auctions of securities and term deposits. 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.