Bangko Sentral to cut RRR and create reserves for smaller banks

Bangko Sentral ng Pilipinas (BSP) plans to lower the reserve requirement ratio (RRR) of banks, building up reserves for smaller banks as interest rates cease to rise.

On the sidelines of the presentation of the law book “Philippine Banking Law: Annotations” on Friday, BSP Governor Felipe Medalla told reporters that the central bank would cut banks’ RRRs to prevent monetary tightening.

“We will compensate for this by simultaneously reducing reserve requirements and providing reserves for smaller banks before their loans mature so they are not caught off guard,” Medalla said.

He said loans for micro, small and medium-sized enterprises (MSMEs), which were used as an alternative to meet reserve requirements, would only be available to smaller banks.

“Bye [there is the] of the original loan, the remaining unpaid principal will continue to qualify as reserves until maturity. But we will give it, most likely, only to small banks. So maybe savings banks and rural banks,” Medalla said.

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The central bank governor has confirmed that the MSME lending measure will expire on June 30, 2023, but they are considering extending the deadline for smaller banks.

In an effort to increase lending to the sector, in April 2020, for the first time, the BSP allowed MSME loans to be considered as part of banks’ reserve requirements.

These include lowering the credit risk weight of MSME loans and using peso loans for MSMEs and large firms as an alternative method of meeting reserve requirements for deposit liabilities and deposit substitutes.

As of December 2022, banks have provided loans to MSMEs in the amount of 263.1 billion pesos, which is about 15.9 percent of the total required reserves and significantly higher than 8.7 billion pesos in MSME loans registered on April 30, 2020.

The NPP for universal and commercial banks is currently 12 percent, one of the highest in the region, while savings and rural lenders have reserve requirements of 3.0 percent and 2.0 percent, respectively.

The central bank intends to reduce the RRR of large banks to single digits by the end of the year.

Medalla said they do not plan to cut RRR at the next policy meeting as BSP wants to always distinguish between policies and operations.

“What we’re looking at is reducing reserve requirements on operations because we can always offset the effects of changes in reserve requirements by increasing or decreasing our borrowing,” Medalla said.

At their May meeting, the monetary authorities decided to suspend the increase in key interest rates, as inflation showed a downward trend, as a result of which key interest rates reached 6.25 percent.

Inflation dropped to 6.6 percent in April from 8.7 percent in January. The Monetary Board cut its inflation forecast for 2023 from 6.0 percent to 5.5 percent, and the estimate for next year was cut to 2.8 percent from 2.9 percent.

Other map laws and regulations

When asked about the recent rules being discussed, Medalla said the ability to borrow directly from the public was the most important piece of legislation they requested.

Medalla said the amendment has increased the central bank’s ability to manage excess liquidity in the economy, which has a negative impact on the local currency.

“We have found in the past that when we buy dollars, it increases the money supply. So we have to borrow to keep the money supply from growing too much,” Medalla explained.

“We found that if we borrow money from banks, banks can easily change their mind and lend money. Whereas when we borrow from the public, they will most likely continue to roll over,” he added.

Medalla reiterated that borrowing from the public was a more effective way to control the money supply than borrowing from banks.

“Because if we were printing money to buy foreign currency, the very process of buying foreign currency would create too much money in the system,” he added.

Moreover, Medalla also noted that the central bank is awaiting consideration of a request to loosen the secrecy of deposits.

“From our point of view, at the very least, bank secrecy laws should not prevent auditors from checking deposits if they have serious suspicions that bank owners are hiding dishonest money in some accounts,” the central bank said. – explained the head of the bank.

Medalla reiterated that the auditor should be allowed to examine the deposits of specific banks.

On March 20 last year, the House of Representatives passed in the second reading amendments to the Republic Act 1405, which regulates bank secrecy.

The proposal aims to remove barriers to effectively investigating and punishing corrupt or illegal financial conduct by shareholders, owners, directors, trustees, officers or employees of BSP controlled and controlled entities.

The measure also aims to combat tax evasion, money laundering and other financial crimes while adhering to international financial transparency standards.

It prohibits officials or employees of BSP and banking institutions from disclosing any deposit information to anyone other than those authorized by law.