BNM’s SRR cut to benefit banks

The central bank announces the SRR ratio will be reduced from 3.5% to 3% to maintain sufficient liquidity in the domestic financial system

By MARK RAO / Pic By TMR File

ABOUT RM2.6 billion in funds are expected to be freed in the Islamic banking sector after Bank Negara Malaysian (BNM) moved to lower the statutory reserve requirement (SRR) to 3%, allowing banks to generate additional returns while stimulating lending activities in the country.

In a statement last Friday, the central bank announced the SRR ratio will be reduced from 3.5% to 3% effective Nov 16, 2019, to maintain sufficient liquidity in the domestic financial system.

The move comes as BNM chose to maintain its overnight policy rate (OPR) at 3% last week.

The SRR requires banking institutions to maintain balances in their statutory reserve accounts equivalent to a certain proportion of their eligible liabilities at no interest.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said the lower SRR threshold is estimated to free up about RM7.4 billion in cash across the Malaysian banking system.

This comprises RM4.7 billion at commercial banks, RM2.6 billion at Islamic banks and RM106 million at investment banks, he noted.

“(The freed money) can then be lent out or placed in money markets or other yield-bearing assets,” he told The Malaysian Reserve (TMR) when contacted.

“If the funds are placed in a yield-bearing asset, and assuming a 3% interest rate based on the current OPR, we estimate the Malaysian banking system to generate RM222 million in returns per annum.”

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the SRR cut is aimed at providing additional liquidity to the financial system amid a time of slowing loan growth.

“Banks would have more cash to “play around” with since keeping their funds for statutory requirement with BNM would earn them no returns,” he told TMR.

“Therefore, the additional liquidity would help to stimulate the lending activities at a time when loan growth has been moderating to 3.8% as of September from 7.5% in January this year.”

He said the SRR cut will reduce the cost of funds for a bank to some degree, albeit marginally since keeping cash for the statutory requirement is an opportunity cost for a bank.

BNM’s decision to lower the SRR threshold is thus a net positive for the Malaysian banking sector which is bracing against moderating loan growth and tighter interest margins following BNM’s 25 basis points cut in the OPR in May this year.

Neither Islamic nor conventional banks have been spared in this scenario. The SRR cut is seen as timely to alleviate some of the pressure facing the banking sector.

BNM’s decision to maintain the OPR last week was a relief for banks, as there were growing expectations the central bank would deploy monetary easing to stimulate the domestic economy amid a slew of external risks.

The move to lower the SRR rather than the OPR has been generally welcomed by analysts. Rakuten Trade Sdn Bhd VP for research Vincent Lau said the SRR cut is set to benefit banks by injecting additional liquidity into the banking system.

“(Both the SRR cut and maintaining of the OPR) reduces banks’ margin pressure…It is a good move to lower the SRR,” he told TMR.

According to BNM, the SRR can be raised to manage the significant build-up of liquidity in the banking system which could result in financial imbalances and create risks to financial stability.

Conversely, the threshold can be lowered to support the transmission of monetary policy rates to retail rates if necessary.

BNM stressed the change to the SRR is not a signal of its monetary policy stance of which the OPR is the sole indicator.

Excluding development banks, there are 54 licensed financial institutions in Malaysia today, comprising of 26 commercial banks, 17 Islamic banks (one of which is international) and 11 investment banks.

The financial index rose 80 points or 0.5% to 15,771 last Friday as investors bought into several banking groups on the BNM decision.

Malayan Banking Bhd rose eight sen to RM8.83 while CIMB Group Holdings Bhd was up 10 sen to RM5.40 and Public Bank Bhd up eight sen to RM19.94.

RHB Bank Bhd rose one sen to RM5.77 while AMMB Holdings Bhd was up five sen to RM4.14 while Affin Bank Bhd rose two sen to RM1.97, The exchange’s only Shariah approved banking group, BIMB Holdings Bhd, rose three sen to RM4.28.