Medium, small banks get reserve cuts too

MANILA, Philippines —  The Bangko Sentral ng Pilipinas (BSP) decided yesterday to cut the level of deposits mid-sized and small banks are required to keep with the central bank to release additional funds into the system and boost the country’s slowing economic growth.

BSP Governor Benjamin Diokno said the Monetary Board approved the reduction of the reserve requirement ratio for thrift or mid-sized banks to six percent from the current level of eight percent in three tranches similar to the schedule for universal and commercial or big banks.

Diokno said the first tranche equivalent to 100 basis points is effective on May 31 followed by 50 basis points on June 28, and 50 basis points on July 26.

Likewise, Diokno said the RRR for rural and cooperative or small banks was reduced by 100 basis points to four percent from the current five percent effective May 31.

“The BSP will issue the necessary circular shortly,” Diokno said in a text message.

BSP Deputy Governor Diwa Guinigundo said the reduction of the RRR for mid-sized and small banks is smaller as universal and commercial banks account for most of the banking system’s liquidity.

“So if their RRR reduction is expected to infuse the market with about P190 billion once completed the coverage of the other banks would just add a smaller amount,” Guinigundo said in a text message.

Michael Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said the move is expected to free up more than P20 billion in additional funds into the financial system.

Ricafort said for every one percentage point cut in the RRR for thrift and savings bank about P9.3 billion worth of additional funds are injected into the financial system, and P1.8 billion for rural and cooperative banks.

Last May 16, the central bank slashed the RRR for universal and commercial banks by 200 basis points in three tranches with the first batch of 100 basis points effective May 31 followed by 50 basis points on June 28, and another 50 basis points on July 26.

This would reduce the level of RRR for big banks to 16 percent from the current 18 percent but would still remain one of the highest in the region.

The delayed passage of the 2019 national budget and series of rate hikes by the BSP to prevent inflation from spiralling out of control pulled down the country’s gross domestic product (GDP) growth at its slowest pace in four percent with 5.6 percent in the first quarter from 6.3 percent in the fourth quarter.

Inflation eased for the sixth straight month to hit a 16-month low of three percent in April from 3.3 percent in March.

Inflation kicked up to 5.2 percent last year from 2.9 percent in 2017 after peaking at 6.7 percent in September and October. The consumer price index exceeded the central bank’s two to four percent target due to elevated oil and food prices as well as weak peso, prompting the BSP to raise rates by 175 basis points in five straight rate-setting meetings from May to November.

However, easing inflation and slower economic growth allowed the BSP to reverse its tightening cycle with a rate cut of 25 basis points last May 9.

“Thus, the overall additional peso liquidity to be infused into the local financial system from any combined RRR cuts for all banks worth a total of at least P200 billion would be postive for both the Philippine economy and financial markets, in terms of greater economic activities and faster GDP growth,” Ricafort said.