BSP unleashes over P300 billion thru banks' reserve requirement cut

Banks' reserve requirement ratio (RRR) will be further reduced, the Bangko Sentral ng Pilipinas (BSP) said in a report by Philippine News Agency.

In a statement Friday, the central bank said the RRR of universal and commercial banks and non-bank financial institutions with quasi-banking functions (NBQBs) will be reduced by 200 basis points to 5 percent.

The reserve requirement for digital banks will also be reduced by 150 basis points to 2.5 percent.

Thrift banks' RRR will likewise be slashed by 100 basis points to 0 percent.

"The new ratios shall take effect on the reserve week beginning on 28 March 2025 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs," said the BSP.

Reserve requirements refer to deposits and deposit substitute liabilities that banks must set aside as standby funds.

These cannot be used for lending activities to ensure that banks will be able to meet their liabilities in case of sudden withdrawals.

According to the BSP, changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management by the central bank.

"The BSP reiterates its long-run goal of enabling banks to channel their funds more effectively toward productive loans and investments. Reducing RRRs will lessen frictions that hinder financial intermediation," said the BSP.

In a Viber message, Rizal Commercial Banking Corporation chief economist Michael Ricafort said about P320 to P330 billion will be infused into the banking system once the RRR cut takes effect.

"Banks have the option to increase their loans, investments in bonds, equities, forex, and other assets. Instead of being idle as required reserves, at least the PHP320 billion-PHP330 billion would be deployed to more productive investment outlets that generate earnings," said Ricafort.

"Thus, more loanable funds by large banks would lead to more lending activities at lower intermediation costs that also reduces borrowing costs, thereby would lead to more investments, more employment, greater trade, and more economic activities all of which would lead to faster economic growth," he added.