Statutory reserve requirement may be raised to curb hot money

KUALA LUMPUR: There are fears in the banking and finance sector that a hike in the statutory reserve requirement (SRR) to cool hot money inflow may impact loan activity and result in an economic slowdown.

Bank Negara's SRR, which is currently set at 1%, is the amount of money that all the country's commercial, investment and Islamic Banks must set aside and lodge with it.

“A 1% increase in the SRR rate could drain some US$1.3bil from the banking system, just a fraction of the funds available to the sector for lending purpose,” Oxford Business Group (OBG) said in its latest economic update.

Since December 2008, when the SRR stood at 4%, Bank Negara has implemented a series of reductions, with the current 1% introduced in March 2009.

On Jan 27, although the central bank left the key overnight policy rate (OPR) unchanged at 2.75%, it hinted at additional policy tools, such as the SRR and macroprudential lending measures, being considered to avoid the risks of macroeconomic and financial imbalances.

According to OBG, though only a relatively small amount, an increase in the SRR rate would send a message to the financial sector, and could cool the hot money flow.

The direct impact of any such rate increase on domestic lending has divided analysts, with some fearing it could prompt a more conservative approach by banks, thus reducing the gross domestic product growth.

Loan activity too could be affected if Bank Negara intervened and a forecast slowdown in the property market occured late in the year, OBG quoted ECM Libra Capital head analyst Bernard Ching as saying to the Borneo Post.

“Loan growth will also be dampened by the impending SRR hike and imposition of macro-prudential lending measures as guided by Bank Negara on Jan 27.”

According to Maybank Investment Bank, there is a chance of Bank Negara's Monetary Policy Committee raising the SRR at its next meeting in March by at least 100 basis points.

Others are more optimistic, with Hwang-DBS Research predicting that loan levels will grow by 13% this year, slightly better than the 2010 performance, with economic expansion and high-impact projects generating a multiplier effect that will spur consumer and business spending, backed by bank lending.

“Of course there is no guarantee that Bank Negara will use the SRR as a means to limit the flow of liquidity.

“Indeed, it is possible that it may leave all of its option on the table for now, given the potential of another economic slowdown due to the weakened recovery in Europe and the United States,” OBG said. - Bernama