Cut in statutory reserve requirement to ease funding costs

Afzanizam: Banks will have more cash to lend and invest and the additional liquidity will help to stimulate the lending activities.

The move by Bank Negara to lower the non-interest bearing statutory reserve requirement (SRR) ratio to 3.00% from the current 3.50% will release about RM7.4bil into the banking system and ease funding costs, according to economists.

The central bank said it will lower the SRR ratio effective from Nov 16.

Lee Heng Guie, who is the executive director of Socio-Economic Research Centre of the Associated Chinese Chambers of Commerce and Industry of Malaysia, says the cut in SRR ratio will relief the cost of funds for banks as they are able to lend more.

Since it is a non-interest bearing ratio, banks could also have extra monies to invest into the Malaysian Government Securities (MGS), he tells StarBizWeek. The Malaysia 10-year bond yield was hovering at 3.45% yesterday.

The central bank last lowered SRR ratio from 4% to 3.5% on Feb 1,2016.

However, Lee(Aboce pic) notes that the reduction in SRR will not see a cut in interest rates by banks as the SRR is merely an an instrument to manage liquidity in the banking system and is not a tool used in monetary policy.

The central bank at its latest Monetary Policy Committee (MPC) meeting had retained the country’s benchmark interest rate at 3% in line with market predictions.

On whether there will be more cuts in the SRR, Lee notes that it depends on the overall state of the economy and how the economy pans out, moving forward.

A cut in the SRR, according to an economist, could also come into play if the liquidity in the banking system is further impacted by foreign capital outflows amid the external headwinds and domestic uncertainties.

The central bank in a statement noted that the decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system.

“This will continue to support the efficient functioning of the domestic financial markets and facilitate effective liquidity management by the banking institutions.

“The SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy. The overnight policy rate (OPR) is the sole indicator used to signal the stance of monetary policy, and is announced through the Monetary Policy Statement released after the MPC meeting, ” it says.

Meanwhile, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid agrees that the reduction in the SRR will ramp up additional liquidity into the financial system.

“So banks will have more cash to lend and invest and the additional liquidity will help to stimulate the lending activities at a time when loans growth has been moderating to 3.8% as of September from 7.5% in January this year.

“Using the September figure as a yardstick to gauge how much it will add the liquidity into system, the amount of liquidity that will be released will be around RM7.4bil with the reduction in the SRR ratio.

“To some degree, it could also reduce the cost of funds of a bank albeit marginally since keeping cash for statutory requirement is an opportunity cost to the bank, ” he adds.