ANZ: RRR cuts to have limited impact on credit growth

MANILA, Philippines — The decision of the Bangko Sentral ng Pilipinas (BSP) to lower banks’ reserve requirement ratio (RRR) may not translate into a significant increase in bank lending, according to ANZ Research.

Sanjay Mathur, chief economist for Southeast Asia and India at ANZ, said that the additional liquidity brought by the RRR cuts might not necessarily lead to more loans due to uneven demand.

“An increase in loanable funds does not automatically translate into actual lending of a similar magnitude. Actual lending also depends on demand, which is currently concentrated in some segments of household credit,” Mathur said.

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

The BSP slashed the RRR of big banks as well as non-bank financial institutions with quasi-banking functions by 250 basis points to seven percent from 9.5 percent.

Likewise, the RRR for digital banks was reduced by 200 basis points to four percent from six percent, while the RRR for thrift banks was cut by 100 basis points to one percent from two percent.

The level of deposits small or rural and cooperative banks are required to keep with the BSP was lowered to zero from one percent.

The new ratios will take effect on Oct. 25.

According to Mathur, these reductions would inject around P300 billion or 1.1 percent of gross domestic product into the financial system.

But more loanable funds does not equate to additional loans. Most of the additional liquidity will also be absorbed via the BSP’s market-based tools of liquidity management.

“In our view, banks are currently not facing a shortage of loanable resources but rather uneven demand. This is evident from the fact that both the overall and incremental loan-deposit ratios are running at levels lower than in the pre-pandemic period,” he said.

Notably, categories such as credit card and salary loans are rising rapidly. But this reflects weak household economic conditions rather than favorable income prospects.

This trend, according to ANZ, indicates financial strain on households rather than confidence in the economy.

The BSP’s consumer surveys also point to both muted expectations of economic conditions and a desire to rebuild savings, Mathur said.

“The proportion of households with savings has recently improved but remains well short of pre-pandemic levels. We attribute this to the combination of lower paying jobs created in the post-pandemic period and higher inflation, particularly in essentials like food and utilities,” he said.

The central bank’s business sentiment survey showed that competitive pressures and insufficient demand are more overwhelming constraints than high interest rates or access to credit.

“Therefore, it is likely that corporate credit may not materially respond to the lower lending rates that may arise from lower intermediation costs of banks,” he said.

On the other hand, banks will still benefit from lower RRR as reserve requirements do not earn any interest and tend to suppress banks’ net interest margins (NIMs).

The NIMs of banks have increased during the BSP’s tightening cycle, but this will likely reverse amid the central bank’s shift to monetary policy easing.

“A reduction will therefore bolster bank profitability and reduce intermediation costs. It should also, over time, improve policy transmission,” Mathur said.