Reserve requirement cut

Saturday, February 4, 2012

THE Monetary Board decided this week to cut the banks’ reserve requirement ratio by three percentage points, from the current 21 percent, starting in April.

This is expected to help banks cope with changes in the Bangko Sentral ng Pilipinas’s (BSP) reserve requirement policy, without having to increase deposit or lending rates and service fees.

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The BSP, in a press statement yesterday, said the board approved three changes in its reserve requirement policy when it met last Thursday. It will impose a single reserve requirement, instead of the statutory and liquidity reserves; stop paying banks interest on the new reserve requirement; and exclude vault cash and demand deposits as eligible forms of reserves.

“The board expects that the rationalization of the reserve requirement policy will increase the effectiveness of reserve requirement as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance,” the statement said.

The BSP uses reserve requirements—a percentage of bank deposits that banks cannot lend—to regulate money supply in the banking system. These apply to peso demand, savings, time deposit and deposit substitutes of universal and commercial banks.

Brisk credit activity

At present, the BSP pays banks interest of four percent per annum for up to 40 percent of the reserve requirement that banks deposit with the BSP.

The Monetary Board also decided last month to cut key policy rates by 25 basis points to 4.25 percent for overnight borrowing or reverse repurchase facility and 6.25 percent for overnight lending.

Also yesterday, the BSP reported that an increasing demand from enterprises and households for loans kept credit activity brisk from October to December last year.

The Senior Bank Loan Officers’ Survey for the last quarter showed that banks expect demand for credit from both businesses and households to increase this quarter.

Attractive financing terms, relatively low interest rates, and a higher housing investment of households contributed to the increase in demand for household loans in the final months of 2011, majority of loan officers told the BSP.

Vehicle sales rebounded in October and November 2011, after contracting for two quarters.

Resilient domestic demand and increasing household consumption, made possible by steady remittances from abroad, have helped cushion the country from the effects of economic turmoil in larger economies, particularly in Europe.