BSP reduces bank's reserve requirement ratios

The Bangko Sentral ng Pilipinas (BSP) announced on Friday it would reduce the reserve requirement ratios (RRRs) for banks operating in the country to streamline the financial system.

In a statement, the BSP said the RRRs would be reduced by 250 basis points (bps) for universal and commercial banks (U/KBs) and non-bank financial institutions with quasi-banking functions (NBQBs).

Digital banks will see their RRRs slashed by 200 bps, while thrift, rural, and cooperative banks will see their RRRs reduced by 100 bps.

"The reduction shall bring the RRRs of U/KBs and NBQBs to 7.0%; digital banks to 4.0%; TBs to 1.0%; and RCBs to 0.0%," the BSP added.

The new ratios shall take effect on the reserve week beginning October 25 this year "and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs," the BSP stated.

The BSP emphasizes that these reserve requirement adjustments align with its continuing efforts to reduce distortions in the financial system. The reductions will lower intermediation costs and promote better pricing for financial services.

"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 better to align them with regional norms over the medium term," the statement said.

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.

BSP Governor Eli Remolona Jr. signaled a substantial cut in banks' RRR earlier this week.

"We will reduce reserve requirements substantially this year and then there may be further reductions by next year," he said.

Rizal Commercial Banking Corporation chief economist Michael Ricafort said the reduction in banks' RRR will increase loan demand and boost economic growth.

Ricafort said that around P150 billion per 1 percentage point RRR reduction, or a total of about P375 billion for the 2.5 percentage points cut in RRR, will be released into the financial system in terms of more funds available for lending.

"This would lead to lower intermediation costs by banks and would be passed on in terms of lower loan rates, " he said.

"Furthermore, there would be more pesos that could be invested in the financial markets such as bonds and other fixed income investments, stocks, currency, property, among others," he added.