The Bangko Sentral ng Pilipinas (BSP) has delivered on its promise to reduce the reserve requirement ratios (RRRs) for banks, cutting the RRR of universal and commercial lenders (U/KBs) in the country by 250 basis points.

In an announcement on Friday (September 20), the central bank says the new ratio shall take effect on the reserve week beginning October 25. This brings the RRR of U/KBs to 7%, from the previous 9.5%. 

The BSP also cut the reserve requirements for non-bank financial institutions with quasi-banking functions to 200bp for digital banks and 100bp for thrift banks (TBs), rural banks, and cooperative banks (RCBs). 

This means that digital banks will now only be required to hold 4% in reserves, thrift banks will need to keep 1%, while RCBs are not required to hold reserves. 

“The new ratios… shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs,” the central bank says. 

'Ridiculous level'

The announcement came just days after BSP governor Eli Remolona signalled that the BSP was looking to issue a “substantial” reduction in banks’ reserve requirements. Remolona earlier called the 9.5% RRR in the country a “ridiculous level”. 

“The reductions will lower intermediation costs and promote better pricing for financial services,” the BSP says. Prior to Friday, the central bank last cut the RRR in June 2023.

However, the BSP’s pronouncement is effective for all banks across the different sectors, something some bankers were hoping would not be the case. 

Earlier, Jose Teodoro “TG” Limcaoco, president and chief executive officer of the Bank of the Philippine Islands, the country’s fourth largest lender, called on the BSP to issue a conditional RRR cut in exchange for the big banks’ elimination of interbank transfer fees.

“The same way the central bank incentivizes the thrift banks to lend to the lower segments by giving them a lower reserve requirement, why can’t you incentivize any bank that does free transfers by cutting reserve requirements?” Limcaoco said last month. 

Not the last reduction

However, Remolona has since indicated that he favoured a more universal rate cut. 

“The banks want a reduction of the reserve requirement and they're saying if you do reduce it, we'll do this other thing for you, reduce transaction costs on payments, for example. We're trying to manage that,” Remolona told local reporters earlier this week. 

Still, the BSP says this latest RRR cut will not be the last, and that as inflation in the country continues to track “a target-consistent path over the next two years”, the central bank will also continue to reassess the need for further reductions in the RRRs “to better align them with regional norms over the medium term”.

At present, the Philippines maintains one of the highest RRRs globally. In contrast, neighbouring Southeast Asian countries have much lower reserve requirements: 1% in Thailand, 2% in Malaysia, 6% in Brunei, and 7% in Cambodia. After this latest RRR cut, Indonesia, which has raised its RRR in recent years to 9%, now has one of the highest in the region.