PETALING JAYA: Despite the tough economic conditions in the wake of the Covid-19 pandemic, the ample liquidity in the banking system does not at the moment warrant a further statutory reserve requirement (SRR) cut.
The SRR ratio was last cut in March this year by 100 basis points (bps) to 2%. Bank Negara had reduced the SRR ratio by 50bps to 3.00% on Nov 16,2019.
Prior to this, the ratio was lowered from 4% to 3.5% on Feb 1,2016. The lowest it went down was 1.0% on March 1,2009 during the global financial crisis.
SRR is non-interest bearing balances that commercial banks are required to keep with the central bank. It is also an instrument to manage liquidity.
A lower SRR would mean a lower amount to be set aside and this would reduce the banks’ cost of funds as the excess funds could be used for lending purposes.
Economists do not expect any further cuts in the SRR ratio for the remainder of the year since the ratio was cut in March.
AmBank Group chief economist Anthony Dass, who is also member of the economic action council secretariat, told StarBiz he expected the current SRR ratio to be maintained for the year.
“Looking at the current SRR, the central bank has allowed all banks and principal dealers to use the Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) papers to fully meet their SRR compliance until May 31,2021.
“Such policy measures will allow banks and principal dealers to ‘substitute’ their MGS and MGII holdings for liquidity locked under the SRR, ” he added.
Previously, the central bank only allowed principal dealers to recognise both MGS and GII of up to RM1bil.
Given the current uncertainties on the global front, driven by the risk of a potential second wave of the Covid-19 pandemic, the global trade war, geopolitical and political issues as well as the domestic challenges underpinned by business and consumer sentiments, Dass said there is more opportunities for the overnight policy rate (OPR) to be reduced instead.
“Such a move is expected to help reduce borrowing cost at a time where the moratorium is expected to end in September with the possibilities for more targeted strategy.
“Besides, with the economy in the deflationary environment, added with downside pressure on wages and employment, it opens the door for rate cuts than for SRR for now, ” he said.
Bank Negara, at its latest policy meet, had slashed the benchmark interest rate to an all-time-low of 1.75% since 2004, a clear signal of the need to reinvigorate consumption and investments.
The OPR was cut by 25 bps from 2% earlier, marking it the fourth round of cuts this year.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid (pic below) told StarBiz that he was somewhat neutral on the SRR cut as the the prevailing liquidity condition was still ample.
“Judging from the latest liquidity coverage ratio, which is in the region of 140% for the month of May, it is still way above the minimum level.
“Also, the net benefit to the banks is fairly small in terms of reducing their cost of funds. Therefore, we expect the SRR ratio to be at status quo alongside our OPR projection of 1.75% throughout the year, ” he said.
Meanwhile, RAM Ratings co-head of financial institution ratings Wong Yin Ching (pic below) said liquidity in the domestic banking system at present is still sufficient.
Banks’ liquidity coverage ratio – which indicates banks’ ability to meet liquidity needs over a 30-day stress period – stood at a sound 140% as at end-May 2020. Interbank rates have also been largely steady, she noted.
“If required, the central bank has further room to decrease the SRR ratio, which will allow additional funds to be deployed for lending or investment in corporate bonds. Each 50bps cut is estimated to release around RM7.5bil of liquidity into the system.
“Nonetheless, given the current muted credit demand (end-May 2020: 3.9% year-on-year) as a result of cautious business and consumer sentiments, further reduction in the SRR may not spur much lending activities.
“Impact on margins is also expected to be minimal, given that banks are already allowed to use MGS and MGII to meet the SRR compliance, ” said Wong.