Further cut in reserve requirement eyed

The Bangko Sentral ng Pilipinas said further cuts in the reserve requirement might be considered to address the issue of declining profit margins of banks.

BSP Deputy Governor Diwa Guinigundo said one way to help offset falling margins of banks was to reduce the reserve requirement, which was brought down from 21 to 18 percent early this year.

Reserve requirement is the percentage of deposits that banks are required to keep as reserves. This is one of the tools used by the BSP to manage the level of liquidity within the economy and inflation.

Guinigundo said further reduction of the reserve requirement could be done because inflation was benign and it was expected to remain so in the near term.

Guinigundo, in a briefing on inflation developments held on Friday, said further reduction in the reserve requirement must be done only when the inflation outlook would indicate that the increase in prices would remain within manageable levels even with the increase in liquidity.

A reduction in the reserve requirement results in higher amount of money that will circulate in the economy.

The decline in interest rates to record lows this year led to lower margins of banks on the loans they extend.

A cut in the reserve requirement will allow banks to use idle liquidity for investment and increased lending, and earn more.

The decision of the BSP earlier this year to stop paying interest on the reserves of banks was also blamed for their reduced earnings.

The decision, which is seen to help the BSP trim its huge interest expenditures and aid in its recovery from losses, took effect in April.

Guinigundo said banks should also look for other means to cut costs and increase their revenues.

For instance, he said, banks should push harder the proposal seeking the removal of the mandatory lending provision of the Agri-Agra Law. Under this law, banks are required to allocate 25 percent of their funds to borrowers from the agriculture sector.

Guinigundo said mandated lending was costly for banks, especially when there was no sufficient demand for loans from borrowers in this sector. Sometimes, he said, banks were forced to resort to alternative forms of compliance with the law, such as investing in government-issued bonds that offer very low yields.

Without mandated lending, banks may freely use 25 percent of their funds for other investment activities that could generate better yields.

The Agri-Agra law aims to help develop the country’s farm sector, which accounts for about a fifth of the economy.

Although the objective of mandated lending is noble, Guinigundo said the BSP did not find it prudent.