The Bangko Sentral ng Pilipinas (BSP) will no longer allow big banks or the universal and commercial banks to use loans to select sectors as alternative compliance with the reserve requirements (RR) after July 1 this year.

However as announced earlier, thrift and rural banks can still utilize loans to micro, small and medium enterprises (MSMEs) as well as eligible large enterprises as RR compliance until its full payment or settlement but not later than Dec. 31, 2025.

In a statement on Wednesday, June 28, the BSP said it will “begin to unwind” the temporary regulatory relief measure that was first implemented in March and April 2020 to assist “critically impacted” sectors when the Covid-19 pandemic hit the globe and interrupted all economic activities.

“The unwinding of the relief measure is set to coincide with the reduction in the reserve requirement ratios (and) to facilitate the transition,” said the BSP, adding that this should support banks’ “continued compliance with the RR and managing friction costs related to the policy adjustment.”

The BSP on June 8 announced that it is reducing banks and non-banks’ RR ratios by June 30 this year and by July 1, big banks will no longer be allowed to use MSME and large enterprises loans as alternative compliance with the RR.

As for the smaller thrift, rural and cooperative banks, it will still be allowed to utilize their outstanding MSME and large enterprises loans as of June 30 as alternative compliance with the RR until such loans are fully paid, but not later than end-December next year.

The BSP said that the outstanding MSME and large enterprises’ loans of thrift, rural and cooperative banks that subsequently become past due or non-performing, or are extended, renewed, or restructured, will not be eligible as alternative compliance with the RR.

The central bank also clarified that new MSME and large enterprises’ loans that are granted by banks after the expiry of the relief measure will not be eligible as alternative compliance with the RR.

“The unwinding of the temporary relief measure will restore the use of the RR as an instrument for managing liquidity in the financial system in line with the BSP’s broader agenda of enhancing its liquidity management capabilities. It will also simplify the administration of banks’ compliance with the reserve requirement,” said the BSP on Wednesday.

Based on BSP data as of end-April, banks’ loans as alternative compliance to RR amounted to P302.4 billion, up eight percent from P277.8 billion same time in 2022.

Of the total, P236.9 billion are loans MSMEs while P65.5 billion are borrowed by large enterprises that are not affiliated with conglomerates.

MSME loans accounted for 14.1 percent of the total required reserves for the covered reserve week while loans to large enterprises were at 3.9 percent.

Meanwhile, the BSP cut the RR ratio of the big banks and non-bank financial institutions by 250 basis points (bps), digital banks by 200 bps, and 100 bps for thrift banks, rural and cooperative banks.

By June 30, all big banks’ RR ratio as well as non-banks with quasi-banking functions will be 9.5 percent from 12 percent, while digital banks’ ratio will be six percent from eight percent. Thrift banks’ RR ratio is slashed to a low of two percent from three percent, while rural and cooperative banks will only have one percent.

The new ratios will apply to the local currency deposits and deposit substitute liabilities of banks and non-banks.

The BSP has previously announced to the market that it will reduce the RR ratios before the expiration of a pandemic relief measure on June 30.