Banks diverted funds to government securities, instead of lending to the public, after the Bangko Sentral ng Pilipinas reduced their reserve requirement ratio, according to an economist.
ING Bank Manila senior economist Nicholas Mapa said in a report Wednesday that bank loans would likely register a lackluster growth because most banks decided to unleash the liquidity freed by RRR cut to government securities. Reserve requirement refers to the percentage of bank deposits that banks cannot lend out or reinvest.
The Monetary Board on Oct. 24 cut again the reserve requirement ratio of universal and commercial banks by 100 basis points or one percentage point to 14 percent effective the first week of December.
“So far, BSP has implemented 200 bps worth of RRR reductions with 200 bps worth more in the pipeline. Governor [Benjamin] Diokno shared that this initial 200 bps reduction, resulting in a fresh P200 billion in additional liquidity, has gone almost exclusively to the local GS [government securities] market with data corroborating this claim with trading volumes spiking right after each RRR infusion,” Mapa said.
He said while commercial bank lending continued to grow, it was not at the pace most would have expected after the deluge of additional funds through the RRR reductions.
Latest data from the BSP showed that outstanding loans of universal and commercial banks, net of reverse repurchase placements with the BSP, grew at a slower rate of 10.5 percent in August from 11.1 percent in July. On a month-on-month seasonally-adjusted basis, commercial bank loans net of RRPs grew by 0.7 percent.
“In short, RRR infusions have done little so far to bolster actual real economic activity with funds diverted back to the Bureau of the Treasury [and eventually the BSP’s Treasury single account] or with the BSP’s overnight windows,” Mapa said.
“Analysts have pointed to the dovish governor and his dovish pronouncements throughout as the reason for sluggish lending growth rates as CFOs simply sign up for working capital but direct ambitious investment plans to the back-burner as the ‘wait for rates to hit rock bottom,’” he said.
“Thus, we may continue to see bank lending remain in lackluster growth despite successive reductions to RRR as cash infusions simply revert to the national government coffers,” Mapa said.
Mapa said the Bangko Sentral was busy reducing reserve requirements as inflation dynamics afforded the central bank the leeway to carry out its broader financial reform agenda laid out by former Governors Amando Tetangco Jr. and Nestor Espenilla.
He said learning from previous episodes, the BSP opted to slash RRR quickly now that inflation was well below target and liquidity conditions appeared tight in the first half.
“Diokno moved quickly to reduce RRR by a projected 400 bps by yearend with the last reduction taking effect as the nation prepares for the holidays,” Mapa said.
Inflation in September 2019 slowed to a 40-month low of 0.9 percent from 1.7 percent in August. It was also significantly slower than the peak of 6.7 percent in September 2018 at the time of high prices of prime commodities, particularly rice.
This brought inflation in the first nine months to an average of 2.8 percent, below the midpoint of the target range of 2 percent to 4 percent set by the government for the year.
The benign inflation environment also prompted the Monetary Board of the BSP to cut the benchmark interest rates by 25 basis points to 4 percent on Sept. 26. The rates on overnight deposit and lending were also reduced to 3.5 percent and 4.5 percent, respectively.
Diokno earlier said he was aiming for a single-digit level of RRR within his term.