BSP may cut big banks’ RRR to 5 percent

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is looking at a significant reduction in the level of deposits banks are required to keep with the central bank after it starts  cutting interest rates this year, its top official said.

BSP Governor Eli Remolona Jr. said the Monetary Board is planning to cut the reserve requirement ratio (RRR) of universal and commercial banks by 450 basis points to five percent from the existing 9.5 percent, the highest in the region.

“We would like to reduce the reserve requirement by quite a bit because I think it’s distorting financial intermediation, but the timing is important. We don’t want to do it while we’re still hawkish,” Remolona said in an interview with Bloomberg TV yesterday.

The BSP chief also said the RRR cuts could be possible in the first quarter next year.

The RRR is the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out and must set aside in deposits with the BSP.

The central bank has already brought down the RRR for big banks to a single-digit level last year from a high of 20 percent in 2018. 

In June 2023, the BSP slashed the RRR for universal and commercial banks as well as non-bank financial institutions with quasi-banking functions by 250 basis points to 9.5 percent from 12 percent previously.

Likewise, the RRR for digital banks was reduced by 200 basis points to six percent from eight percent, followed by mid-sized or thrift banks by 100 basis points to two percent from three percent.

The level of deposits small or rural and cooperative banks are required to keep with the BSP was also lowered by 100 basis points to one percent from two percent. 

From a high of 20 percent in 2018, then BSP governor Nestor Espenilla Jr. committed to bring down the RRR for big banks to single-digit levels by 2023.

The reduction in the RRR coincided with the expiration of alternative modes of compliance with reserve requirements by counting loans extended to micro, small, and medium enterprises as well as large companies by end-June 2023 and thereby ensure stable domestic liquidity and credit conditions.