(Bloomberg) -- The Philippines unleashed nearly $7 billion into the financial system with the cut in banks’ reserve requirement taking effect Friday, funds that could further spur one of Asia’s fastest-growing economies.

Bank of the Philippine Islands President and CEO Jose Teodoro Limcaoco said lenders may use the funds — which some banks estimate at about 400 billion pesos ($6.9 billion) — in increasing lending including to their consumer segment, which fetches higher interest. The RRR cut could lift banks’ net interest margins by 12.75 basis points, said Limcaoco, who also heads the nation’s bankers group.

Bangko Sentral ng Pilipinas announced the 250-basis point cut in September to lower intermediation costs and promote better pricing for financial services. It brings the RRR for big banks to 7% of deposits; the ratio will decline by 200 basis points for digital lenders and 100 basis points for thrift banks.

The RRR cut will improve banks’ net interest margin in the near term as their funding costs drop, said Nicky Franco, head of research at Abacus Securities Corp. “But eventually loan rates will also come down gradually such that in the long run, net interest margins will decline,” he said, noting the central bank’s leaning to cut its key rate further.

Any increase in loan demand spurred by rate cuts may be offset by lower margins, resulting in an overall decline in net interest income, Franco said. The impact of monetary easing on the economy will also probably take a long time so any growth in loans won’t happen overnight, he added. 

Still, the RRR cuts will help delay or ease the compression in net interest margins brought about by BSP’s easing stance, and also improve Philippine banks’ valuation relative to peers, Franco said. But unless loan demand spikes, lenders will likely park the excess funds back with the BSP, he added.

The central bank has said the RRR adjustments are meant to reduce distortions in the financial system, with officials saying it would absorb excess liquidity via its term deposit auctions. At 7% now, Governor Eli Remolona said the ratio remains high compared to other nations in the region, and that it’s possible to cut it to zero by the end of his term in 2029.

--With assistance from Cecilia Yap.

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