Loans the various banks have extended to large enterprises and the micro, small and medium enterprise (MSME) sector no longer count as reserve-eligible funds under latest Bangko Sentral ng Pilipinas (BSP) mandate.
The BSP said the elimination of MSME loans as reserve-eligible funds begins at the same time as the cuts in the banks’ deposit reserve requirement go into effect on the first day of July this year.
“Starting 01 July 2023, universal and commercial banks shall no longer be allowed to use MSME and LE loans as alternative compliance with the reserve requirement (RR),” the BSP said.
The RR relates to that component of the banks’ deposit funds they may not deploy as loans to clients but must instead keep in reserve in the vaults of the BSP at all times.
The loans as reserve-eligible funds came at the time of the Covid-19 pandemic when the banking community amassed as much deposits as they can get from the public but had precious little room to deploy them when economic activity was restrained by an unforgiving virus.
“The BSP will begin to unwind the temporary regulatory relief measure allowing banks to utilize peso-denominated loans to MSMEs and large enterprises (LEs) that are critically impacted by the COVID-19 pandemic as alternative compliance with the reserve requirements (RR) on 01 July 2023. The unwinding of the relief measure is set to coincide with the reduction in the reserve requirement ratios by 30 June 2023 to facilitate the transition, supporting the banks’ continued compliance with the RR and managing friction costs related to the policy adjustment,” the BSP said.
It also said thrift, rural and cooperative banks are allowed to use their outstanding MSME and LE loans as of 30 June 2023 as alternative mode of compliance with the RR until such loans are fully paid, but not later than 31 December 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, are no longer eligible as alternative compliance. Likewise, new MSME and LE loans that are granted by banks after the expiry of the relief measure are no longer eligible as alternative compliance either, the BSP added.
More than P300 billion were estimated to have been released into the financial system when the deposit reserve mix was adjusted, enough funds to perk up the economy without having to stoke headline inflation that even now remains elevated.
In the assessment of the policy-making monetary board of the BSP, however, inflation was seen gradually returning to the 2 to 4 percent target range within an 18-month long policy horizon.
