The Bangko Sentral ng Pilipinas (BSP) will reduce the reserve requirement ratios (RRR) of different bank categories including the big banks by Oct. 25, 2024 in a move that has been anticipated by the market since the BSP cut the policy rate last month.

The BSP on Friday, Sept. 20 announced that it will lower the RRR of the universal and commercial banks by 250 basis points (bps) to seven percent from 9.5 percent beginning on the reserve week of Oct. 25. The same goes for non-bank financial institutions with quasi-banking functions (NBQBs) which will also have an RRR of seven percent.

Other bank categories such as digital banks, thrift banks and rural banks will also have reduced reserves. By next month, the BSP will implement a 200 bps reduction in the RRR of digital banks to four percent; 100 bps cut to thrift banks’ reserves to one percent; and rural and cooperative banks will have zero percent RRR after a cut of a similar 100 bps.

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

“The BSP emphasizes that these adjustments in reserve requirements are in line with its continuing efforts to reduce distortions in the financial system,” it said in a statement.

Reducing the reserves’ ratios lower the banking sector’s intermediation costs. It will also promote better pricing for financial services, said the BSP.

“As inflation continues to track a target-consistent path over the next two years, the BSP will reassess the need for further reductions in the RRRs to better align them with regional norms over the medium term,” said the BSP.

The BSP's Monetary Board approved the RRR reduction under Circular No. 1201, based on an approved resolution last Sept. 5, 2024. The circular was signed by BSP Governor Eli M. Remolona Jr. on Friday.

The last time the BSP reduced the RRR was June last year. It implemented a similar cut of 250 bps for big banks, 200 bps for digital banks, and 100 bps for thrift banks and rural banks.

Remolona said earlier this week that they intend to have more RRR reductions next year as monetary policy settings are further eased. Last Aug. 15, the BSP cut its policy rate by 25 bps to 6.25 percent. The last rate cut was Nov. 19, 2020.

Basically, changes in RRR have a significant effect on money supply in the banking system. A 250-bps RRR cut, for example, translates to fresh funds amounting to P360 billion released into the financial system.

These funds will be either returned to the BSP to park in their various liquidity facilities such as the BSP bills or added to banks’ loan portfolios. Some banks will buy government securities as investments. However, the BSP is hoping the additional bank funds will be used for lending to productive activities.

Meanwhile, Remolona has said that they could reduce the RRR to a low of five percent over time, or within the course of his six-year term until 2029.

Since reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the central bank, these funds cannot be used for lending. As reserves, these funds do not earn income. Reservable liabilities include demand, savings, time deposit and deposit substitutes.

In Asia, the Philippines’ RRR is considered one of the highest. Big banks’ RRR was at its peak at 20 percent in 2014, and at the time, it was the highest in the region.

An RRR cut is not considered a change in monetary policy stance but is merely an operational adjustment on the part of the BSP.