THE BANGKO SENTRAL ng Pilipinas (BSP) has moved to make local bonds issued by banks and quasi banks (QBs) more attractive to investors by reducing the reserve requirement rate (RRR) for such debt by 300 basis points from six percent currently, effective Nov. 1, according to an official statement on Tuesday.

“The Monetary Board approved the reduction in the reserve requirement rate for bonds issued by banks/QBs to three percent as part of its commitment to contribute to deepending of the local debt market,” the BSP said in its news release, noting that the new rate will be lower than reserves mandated for other debt instruments issued by banks like long-term negotiable certificates of time deposits (LTNCDs) currently at four percent.

“The lower bank reserves on bond issuances is expected to reduce bond issuers’ intermediation cost that could be passed on to holders of such securities,” the central bank explained.

The BSP said this latest move complements its streamlining of rules and requirements for banks’ and quasi banks’ issuance of debt instruments.

“These initiatives are intended to incentivize banks/QBs to tap the domestic bond market as part of liquidity management,” the central bank said.

Sought for comment, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in an e-mail that the bond RRR cut “effectively reduces banks’ intermediation costs that would provide banks greater leeway to increase commensurately interest rate returns or yields paid to bondholders, effectively giving greater incentives for investors to put more money on bonds issued by banks.”

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said “[t]his will provide financial institutions more room to access credit markets.”

“This will provide more liquidity to financial firms and more funds means more opportunities for expansion and economic activities,” he explained in an e-mail.

The move is also a way for the BSP to encourage banks to opt for bonds as a funding source, according to ING NV-Manila senior economist Nicholas Antonio T. Mapa.

“BSP is looking to prod banks to source funding via bond issuances and wean them from LTNCDs, with the central bank looking to halt fresh issuances of the instrument in the near term,” Mr. Mapa said in an e-mail, noting that LTNCDs are currently tax-exempt. — Luz Wendy T. Noble