Last week’s decision by the Bangko Sentral ng Pilipinas to reduce the reserve requirements of smaller banks—a week after ordering a similar move for the country’s largest financial institutions—will free up another P20 billion that will help boost Philippine economic growth.
Thus said market watchers who cheered the decision of the Monetary Board to aggressively implement BSP Governor Benjamin Diokno’s plan to mobilize previously idle liquidity in the domestic financial system into productive undertakings.
In a statement, Rizal Commercial Banking Corp. economics and research division head Michael Ricafort said this would “allow smaller banks to increase lending activities to consumers (such as housing loans, auto loans); businesses (especially for micro, small, and medium enterprises); agriculture sector (farming, fishing, forestry, etc.), especially in the countryside or areas outside Metro Manila where most of the smaller banks and their customers are located or based.”
“The resulting increase in lending activities by the smaller banks would help contribute to greater economic activities, especially in the provinces or regions and also contribute to faster overall economic growth,” he added.
Last Thursday, the Monetary Board reduced the reserve requirement ratio of smaller banks by a total of 2 percentage points for thrift banks from the current 8 percent, and by 1 percentage point for rural and cooperative banks from the current 5 percent.
The cut in the reserve requirement of thrift and savings banks to 6 percent will be staggered over three months similar to the schedule of the 2-percentage point cut in the reserves of universal and commercial banks: 1-percentage point cut effective May 31, 2019; 0.5-percentage point cut effective June 28, 2019; and 0.5-percentage point cut effective July 26, 2019.
The 1-percentage point cut in the reserves of the rural and cooperative banks to 4 percent will take effect on May 31.
ING Bank Manila senior economist Nicholas Mapa said that with decelerating inflation— which was forecast to behave well into 2020—and growth slowing somewhat, the time was right for regulators to release more funds into the financial system.
This, he said, was “akin to a transfusion to get the erstwhile anemic economy back on track.”
“For the last two quarters, vehicle sales growth and private construction proved to be lackluster, possibly due to fatigue or even due to elevated borrowing costs after the recent 175-basis point rate hikes,” he explained. “With the one-two punch of the [overnight rate cut] and reserve requirement reductions unveiled, we can look forward to a rebound in growth in the second half of the year as capital formation gets a shot in the arm.”