Bank loans as alternative compliance to the reserve requirement (RR) went up 8.8 percent to P302.4 billion as of end April from same time last year of P277.8 billion, based on Bangko Sentral ng Pilipinas (BSP) data.

Notably, majority or 236.9 billion of total were loans to micro, small and medium enterprises (MSMEs). Meanwhile, P65.5 billion went to large enterprises that are not affiliated with conglomerates.

Both figures were higher compared to 2022 of P212.8 billion RR-compliant MSME loans and P65 billion by eligible large enterprises.

As of end-April, 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. Last year, MSME loans accounted for 13.6 percent of required reserves while large enterprises were at 4.2 percent.

The aggregate limits for MSME loans is P300 billion and P425 billion for large enterprises.

The BSP has extended until June 30, 2023 the RR-compliant MSME and eligible large enterprises’ loans.

The relief measure expired last Dec. 30, 2022, but was renewed for the third time by the BSP from the time 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.

BSP Governor Felipe M. Medalla said previously 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.

RR ratios are required reserves that applies to demand deposits, savings deposits and time deposits.

Changes in reserve requirements have a significant effect on money supply in the banking system. The last time the BSP reduced the RR ratio for big banks was March 2020, when Covid-19 was first declared a global pandemic. The BSP cut the ratio by 200 bps for universal and commercial banks and released P225 billion into the financial system as fresh bank funds and liquidity support.

By August of the same year, the BSP also reduced the RR ratio of thrift and rural banks by 100 bps which translated to P10 billion of additional liquidity.

Reducing the RR ratio will not affect the Monetary Board’s policy stance since the BSP considers the move as an operational adjustment.

The market however views an RR ratio cut as an easing of monetary policy.