BSP to further reduce banks’ RRR

The Bangko Sentral ng Pilipinas (BSP) announced a further reduction in banks’ reserve requirement ratios (RRR) to enhance financial intermediation and liquidity in the banking system.

Under the new policy, the RRR for universal and commercial banks, as well as non-bank financial institutions with quasi-banking functions (NBQBs), will be cut by 200 basis points to five percent.

For digital banks, the reserve requirement will be lowered by 150 basis points to 2.5 percent, while for thrift banks, it will be reduced by 100 basis points to 0 percent.

“The new ratios shall take effect on the reserve week beginning on March 28, 2025, and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs,” the BSP stated.

Reserve requirements refer to the portion of bank deposits that must be set aside and cannot be used for lending, ensuring financial stability in case of sudden withdrawals. The BSP emphasized that adjustments in reserve requirements play a crucial role in managing liquidity in the banking sector.

“The BSP reiterates its long-run goal of enabling banks to channel their funds more effectively toward productive loans and investments. Reducing RRRs will lessen frictions that hinder financial intermediation,” it said.

Economists project that the RRR reduction will inject P320 to P330 billion into the financial system.

“Banks have the option to increase their loans, investments in bonds, equities, forex, and other assets. Instead of being idle as required reserves, at least P320 billion-P330 billion would be deployed to more productive investment outlets that generate earnings,” Rizal Commercial Banking Corporation chief economist Michael Ricafort noted.

He added that an increase in loanable funds would spur more lending, lower borrowing costs, and drive economic growth by encouraging investments, employment, trade, and other economic activities.