Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said they are on track to reducing banks’ reserve requirements (RR) “substantially” this year and in 2025 and are even considering lowering the RR ratio for banks that will offer free interbank transactions.
“We will reduce reserve requirements substantially this year and then there may be further reductions by next year,” Remolona said in a press briefing on Wednesday, Sept. 18.
He reiterated a “promise” he said earlier to cut the RR ratio in 2024 and they are are now “considering it” and is just a Monetary Board meeting away to deciding on the timing and how much to cut. “We have discussed the funding of it. I would say it’s going to happen this year,” he said.
On Wednesday though, Remolona disclosed that he is amenable to making a deal with banks that have long proposed for the BSP to reduce the RR in exchange for a zero or free interbank transfers.
“There’s a funny dynamics going on with the banks … they are saying if you do reduce it (RR) we’ll do this other thing for you (which is) to reduce transaction costs on payments for example,” said the BSP chief.
“We are trying to manage that but the idea is to reduce the reserve requirement in a substantial way,” he added.
Since the time of former BSP governor Felipe M. Medalla, the central bank and the banking sector have been trying to reach an agreement for the removal of fees on small transactions of P1,000 and below. One of the issue is the cost for banks to have zero transaction fees.
For the big banks or the universal and commercial banks, they have been offering free-of-charge transfer service for P1,000 and below but these are on limited time only, subject for renewal depending on the banks.
Meanwhile, BSP Assistant Governor Zeno R. Abenoja said they are prepared to absorb the excess liquidity once the RR ratio for all banks are reduced. A 250 basis points (bps) RR ratio cut, for example, would unleash fresh funds into the financial system of as much as P360 billion.
“If and when the reserve requirement is adjusted downwards, we are hoping that these additional liquidity will be deployed to help expand productive economic activities. However, that will take time so some of it will be deployed by banks in various financial markets including GS (government securities), equity, and some of it will still reside in their accounts including depositing back to the BSP,” he said.
Abenoja also said there is expectation that the volume of operation may increase over the near term “as the banks prepare to deploy these funds productively into the economy, invest it or put it in their loan portfolio (but) in the near term the volume of the entire operations including the BSP bills may expand to help manage these liquidity that will be released to the system.”
Remolona has said that they could reduce the RR ratio to a low of five percent from its current 9.5 percent but the timing is crucial, they had to wait until they have started its monetary policy easing which they did last Aug. 15 when they cut the policy rate from 6.5 percent to 6.25 percent.
The BSP chief said previously they will eventually reduce the RR ratio to five percent within the course of his six-year term as governor. He even noted that the ideal ratio is actually a zero rate.
In June of last year, the BSP reduced both banks and non-banks’ RR ratio to single-digit levels. The RR ratio of the big banks and non-bank financial institutions was reduced by 250 bps; digital banks by 200 bps; and 100 bps for thrift banks, rural and cooperative banks.
All universal and commercial banks’ RR ratio as well as non-banks with quasi-banking functions is now at 9.5 percent from 12 percent, while digital banks’ RR is at six percent from eight percent. Thrift banks’ ratio was cut to two percent from three percent, while rural and cooperative banks have a ratio of one percent.
Since reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP, these funds cannot be used for lending. Reservable liabilities include demand, savings, time deposit and deposit substitutes.
In Asia, the Philippines’ RR ratio is considered one of the highest. Big banks’ RR ratio was at its peak at 20 percent in 2014, and at the time, it was the highest in the region.