Latest BSP aid to MSMEs akin to RRR cut

April 20, 2020

An economist considers as a reserve requirement ratio  cut the Bangko Sentral decision to count as RR compliance the loans extended by banks to micro, small and medium enterprises.

The BSP’s decision was made by the policy-making Monetary Board alongside the 50 basis points cut in the central bank’s key policy rates.

In a report Friday, April 17, ING Bank Manila senior economist Nicholas Mapa said allowing MSME lending as RR compliance “could effectively release P360 billion for fresh lending and then some as any further loans to this sector could eat into the P1.2 trillion set aside in the BSP’s virtual vaults.”

Mapa said BSP Gov. Benjamin Diokno is getting “quite creative” in churning out new ways to help provide stimulus.

Although a different model used by other countries, such as the US and Indonesia, that have specific funds set-up primarily for SMEs, he said the latest central bank decision “follows the current trend of BSP flexing while investors look to the fiscal side of the fence to match”.

“The move looks like a de facto RR reduction as it frees up more money for banks to lend out to the greater public who will be needing cash to fight off the fallout from Covid-19,” he said.

Mapa, however, said that from what they have seen from past RR reductions, credit conditions and the general state of the economy matter in the timing of such moves and “throwing money at the problem is not as effective unless channeled effectively”.

The cut in the BSP’s key policy rates this week brought the total reduction for the year to 125 basis points, while the BSP has so far reduced universal and commercial banks’  RRR by 200 basis points, half of the 400 basis points the MB has allowed Diokno for this year.

In a statement, the BSP said the MB’s off-cycle decision aims to address the economic disruption caused by the global pandemic.

It said the policy rate cut and the increased support for lending to MSMEs would ensure adequate liquidity in the financial system and help reduce borrowing costs.

“These measures should thus mitigate the adverse impact of the outbreak on the economy by reinforcing the health and fiscal measures already being rolled out by the National Government, the BSP said adding “the monetary initiatives will also quicken economic recovery as the pandemic fades.”