BSP targets to reduce RRR to 10%

By Keisha B. Ta-asan | BusinessWorld
February 28, 2023

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely cut banks’ reserve requirement ratio (RRR) to 10% to encourage them to cut transaction fees on small-value digital payments, its governor said on Monday.

“We hope, in return, the banks will waive all fees on small transactions when people make bank-to-bank payments. We’re literally bribing the banks to subsidize the small transactions,” BSP Governor Felipe M. Medalla told an economic briefing on Monday.

He said small-value transactions could include digital transfers of as much as P500. He earlier noted that a P15 fee for a P200 transaction “is quite large relative to the amount being sent.”

“What I’m telling (the banks) is, we’ll be more eager to cut the reserve requirements if they help us in this area. Our target is (to cut the RRR to) 10% and we can make it lower than 10%,” he said.

Mr. Medalla expressed confidence banks would support the move to reduce digital transaction fees.

“I’m confident that it will happen soon. I’m sure the BAP (Bankers Association of the Philippines) will work out a proposal that we can all agree on, a fair way of handling it,” he said.

In a statement, BAP President Antonio C. Moncupa, Jr. said banks support the BSP’s goal to reduce transfer fees to boost financial inclusion.

“While transfer fees are determined by each bank, and the need to cover cost of technology, infrastructure, cybersecurity, consumer education and charges by the switch operator are imperative, the BAP maintains close collaboration with the BSP and stakeholders to ensure that the ultimate goal of financial inclusion is attained in a way that is efficient and sustainable,” Mr. Moncupa said.

The BSP wants 70% of Filipino adults to have a formal financial account by this year. It also wants digital payments to make up 50% of all transactions both in volume and value.

Based on the latest central bank data, banked adults made up 56% of the total population in 2021 from just 29% in 2019.

The share of digital payments in the total volume of retail transactions in the country rose to 30.3% in 2021 from 20.1% a year earlier. The value of payments done online represented 44.1% of total retail transactions, higher than the 26.8% share in 2020.

Meanwhile, Mr. Medalla said the central bank could deliver small increments of reductions in the RRR until it reaches the single-digit level.

“(But) the cut in the reserve requirements will happen (if) everybody believes that inflation is clearly moving towards our target. Our problem is if we cut the reserve requirement, but we’re still raising interest rates, the market might get confused,” he said in mixed English and Filipino.

The RRR for big banks is 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

In March 2020, the central bank cut the RRR, or the percentage of deposits and deposit substitutes banks must keep with the BSP, by 200 bps to 12% to cushion the impact of the coronavirus pandemic.

Mr. Medalla said the BSP is confident headline inflation would return to the 2-4% target by the fourth quarter or early 2024.

Inflation quickened to the fastest in 14 years to 8.7% in January from 8.1% in December, marking the 10th consecutive month inflation was above the BSP’s 2-4% target.

The BSP projects inflation to average 6.1% this year, higher than 5.8% last year, before easing to 3.1% in 2024.

Earlier this month, the Monetary Board hiked the policy rate by 50 basis points to 6%, the highest in nearly 16 years. It has raised the benchmark interest rate by a total of 400 bps since May 2022.

Mr. Medalla also told reporters the Philippines might reach its growth target of 6-7% this year due to strong pent-up demand. The economy grew by 7.6% in 2022.