THE PLANNED CUT in banks’ reserve requirement ratio (RRR) could increase banks’ profits as this would allow them to use more of their cash to fund their loans.

Banks that are more aggressive in expanding their loan book could benefit more from the planned RRR cut, Fitch Asia-Pacific Financial Institutions Director Tamma Febrian said in an e-mail.

“As a general comment, we believe that a reduction in reserve requirement would generally be mildly positive for the banking sector as it will release some liquidity in the system, while also allowing the banks to channel the fund to more productive assets such as loans or higher yielding bonds,” Mr. Febrian said.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla this week said they could cut banks’ reserve ratios within the year to help loosen monetary conditions.

A cut in banks’ reserve requirements is a move intended to be an operational adjustment to facilitate the central bank’s shift to market-based instruments for managing liquidity in the financial system.

The BSP earlier committed to bring down the ratio for big banks to single digits by this year. The ratio for big banks is 12%, one of the highest in the region.

Reserve requirements for thrift and rural lenders are 3% and 2%, respectively.

Mr. Febrian said under Fitch’s base case scenario, they see an increase of about 3-4 basis points (bps) in banks’ net interest margins for every 100-bp cut in reserve requirement.

Instead of a quick reduction in the RRR, a gradual pace would help prevent imbalances in liquidity and allow the system to absorb the excess funds steadily, he added.

Depending on the magnitude of the reduction and the scope of fee-waivable transactions, banks could opt to reduce fees for digital payments, Mr. Febrian said. Banks could also continue to diversify their fee-generating revenue sources to help offset potential losses from cutting digital transaction fees, even without an RRR cut.

“We think that these potential losses can also be offset by the banks’ continued effort to diversify their fee-generating revenue sources such as wealth management and credit card, among many others, over the medium term,” he said.

“Lowering [the] RR would help free up liquidity that can be used by banks for fresh loans. It would make allocation of deposits more market based,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa added in a Viber message.

He said banks can make better business from fresh loans instead of the fee-based segment.

The RRR for big banks could be reduced to 8-10% from the current 12%, he added. — A.M.C. Sy