BY DALJIT DHESI

PETALING JAYA: Expectations are building up for Bank Negara to reduce the statutory reserve requirement (SRR) by between 50 and 100 basis points (bps) this year to release more liquidity into the banking system amidst the slowing economy.

This comes following the recent 25% bps cut in the overnight policy rate (OPR) that has caused a compression in the net interest margins (NIMs) of banks.

Economists and analysts concurred there was still room for further cuts in the SRR to boost liquidity in the banking system, which to an extent could ease pressure on NIMs that would impact banks’ earnings.

Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias told StarBiz that he expected further cuts in the SRR this year, possibly by another 50 to 100 bps to 2.5%-3%.

“We think that the reduction will be done to complement the recent cut in the OPR in an effort to avert further slowdown in the economy in the near term. Lower SRR will release the liquidity that banks can utilise to increase their lending, hence stimulating the economy,” he said.

Notwithstanding this, the sluggish demand for credit may prevent a meaningful pick-up in loans growth this year, he added.

The SRR was cut from 4% to 3.5% effective Feb 1. Bank Negara on July 13 slashed the OPR, which is the rate at which banks lend to each other, by 25 bps to 3%.

This was the first rate cut since 2009 in view of the 2008/09 global financial crisis.

Gross domestic product (GDP) growth for the first quarter of this year was at 4.2% compared with the same quarter a year ago, with the central bank targeting GDP growth of 4% to 4.5% this year.

Meanwhile, MARC head of banking Sharidan Salleh believes that a cut in SRR will ease the pressure on NIMs as more funds could be mobilised to earn interest income.

However, he does not expect the cut to materially boost loans growth. Although supply of credit will increase following a cut in SRR, the demand for credit will still be affected by economic slowdown and weak consumer sentiment.

As at end-May 2016, loans grew slower at 6.2% year-on-year (y-o-y) compared with 7.9% y-o-y as at end-December 2015.

The central bank does not compile NIM statistics but based on analysts estimates, it stood at 2.13% in 2015, which was lower than 2.20% in 2014.

CIMB Investment Bank senior banking analyst Winson Ng said there could be a possible cut in the SRR by another 50-100 bps which would ease the liquidity problem for banks.

He said the cut would help in boosting liquidity but not loans growth on the whole. “A 50 bps cut in SRR would inject RM5bil to RM6bil into the banking system. This is only 0.3%-0.4% of the industry’s total loans as in May (2016),’’ Ng said.

“If at all there is a reduction in SRR, it is likely to be similar to the last one, that is by 0.5%. Any reduction in SRR will generally be neutral to NIM but can be expected to lower the cost of funding for borrowers. The reduction (in SRR) won’t necessarily boost loans growth,’’ said OCBC Bank (M) Bhd country chief risk officer Jeroen Thijs.

According to RAM Ratings co-head of financial institution ratings Sophia Lee, the central bank still has room to further reduce the SRR, which charted a historical low of 1% during the global financial crisis.

“A reduction in the SRR is one of the tools the central bank can utilise to provide liquidity to the system. Early this year, the bank injected some RM6.2bil of liquidity into the system through a 0.5 percentage point reduction in SRR ratio to 3.5%.

“If required, the central bank still has room to further lower the SRR,’’ she noted.

On NIMs, Lee said despite the OPR reduction, the banks’ funding cost was unlikely to improve much as the bulk of the deposits would take time to re-price and the competition for retail deposits would still persist.

Given this, NIMs are expected to narrow and, in turn, lowers banks profitability for the year, she said, adding that in this respect, disciplined cost management would remain high on the agendas of many banks.