Bank services could suffer under proposed changes to reserve reqm't

MANILA, Philippines - Banks warned that the changes to the reserve requirement policy being proposed by the Bangko Sentral ng Pilipinas (BSP) could affect the services being offered to the banking public.

Aurelio Montinola III, president of the Bankers Association of the Philippines (BAP), said in an interview with reporters that the proposed amendments to the components of the reserve requirement ratio could have a direct impact on the daily operations of local banks.

Montinola disclosed that the planned changes could have an impact on the daily businesses of banks including transactions involving automated teller machines (ATMs).

“The impact of the reserve requirement are potentially very expensive. I think there will be a discussion to mitigate the amount of reserve requirement. I’ll just give you an example, if you take out the interest rate you pay on cash in vault, it maybe a good way to examine how much is in the ATM and how much is in the branches. Because otherwise it will motivate everybody to reduce ATM service, which is not good for the public,” he stressed.

The BSP has put forward proposed changes to the reserve requirement policy imposed on banks to operationally strengthen the reserve requirement as a liquidity management tool and at the same time to simplify implementation and enhance the BSP’s monitoring of banks’ compliance with reserve requirements.

Currently, the BSP imposes a 21-percent reserve requirement ratio in banks. Of the total requirement, 10 percentage points is in the form of statutory reserve wherein the banks’ reserves are actually kept in the vault of the BSP while 11 percentage points in the form of liquidity reserves are set aside by banks in their own vaults.

Banks could place up to 40 percent of the regular reserve requirement and this are “paid interest of four percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point.”

Under the proposal, banks would be required to keep all their reserves with the BSP while the amount kept by banks in their vaults would be lifted as the regulator was having difficulty monitoring the banking system’s actual liquidity reserves kept by banks in their own vaults.

Montinola, who is also president of the Ayala-controlled Bank of the Philippine Islands (BPI), pointed out the BSP should study carefully what should be considered as cash in vault or the money that a bank keeps in its vault for daily transactions, such as check cashing or cash withdrawals and is considered part of a bank’s reserve obligation to the BSP.

He said the cash involved in the ATM operations of banks should be exempted from the computation of reserve requirement.

For BPI alone, he said the bank’s ATM network of 1,700 services around P2 billion worth of transactions on a regular day that could go up to between P3 billion and P4 billion on peak days.

“Maybe they should exempt the ATM. The BSP, to be fair, is also very interested in public service and the one of the primary methods is obviously the ATMs. So I think that is a good chance as one of the items for consideration,” he said.

According to him, the industry is not against the proposed changed but reiterated that the amendments should be studied carefully by the central bank. “It should be thought out well,” he added.

The BSP raised interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid rising global oil prices. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

It also raised the reserve requirement ratio for banks by a combined 200 basis points last June 16 and July 28 bringing the threshold to 21 percent from 19 percent to siphon off close to P70 billion from the financial system to curb additional inflationary pressures arising from excess liquidity from strong foreign capital inflows.

Since then, the BSP has kept interest rates unchanged for four straight policy rate setting meetings since May 5 due to benign inflation as well as fragile global economic growth.