BSP stops use of loans as reserve requirement

BANGKO Sentral ng Pilipinas (BSP) will no longer allow universal and commercial banks to continue utilizing peso-denominated loans as alternative compliance with the reserve requirements (RR) starting Saturday, July 1, 2023.

The Central Bank is set to unwind the relief measure it implemented during the height of the Covid-19 pandemic where banks could utilize as RR the peso-dominated loans to micro-, small- and medium enterprises (MSMEs) and large enterprises (LEs) that were critically impacted by the Covid-19 pandemic.

RR refers to the amount of cash, as a fraction of their customers’ deposits, that banks must keep on hand to make sure that they are able to meet their liabilities in case of sudden withdrawals.

The unwinding of the relief measure is set to coincide with the reduction in the reserve requirement ratios (RRR) by Friday, June 30, to facilitate the transition, supporting the banks’ continued compliance with the RR and managing friction costs related to the policy adjustment.

The RRR will be cut by 250 basis points (bps) for universal and commercial banks and nonbank financial institutions with quasi-banking functions, 200 basic points for digital banks and 100 basic points for thrift banks, rural banks and cooperative banks.

Unwind

“Staring July 1, universal and commercial banks shall no longer be allowed to use MSME and LE loans as alternative compliance with the RR,” said BSP in a statement released on Wednesday, June 28.

Meanwhile, thrift, rural and cooperative banks shall be allowed to utilize their outstanding MSME and LE loans as of June 30, 2023, as an alternative mode of compliance with the RR until such loans are fully paid, but not later than December 31, 2025.

The outstanding MSME and LE loans of thrift, rural and cooperative banks that subsequently become past due or non-performing, or are extended, renewed, or restructured, shall no longer be eligible for alternative compliance with the RR.

Likewise, new MSME and LE loans that are granted by banks after the expiry of the relief measure shall not be eligible as alternative compliance with the RR.

BSP said the unwinding of the temporary relief measure will restore the use of the RR as an instrument for managing liquidity in the financial system in line with the BSP’s broader agenda of enhancing its liquidity management capabilities.

“It will also simplify the administration of banks’ compliance with the reserve requirement,” said the BSP. (DCL)