Cash reserve ratio (CRR) is the amount of money that the scheduled banks will have to have in deposit with the central bank of the country at all times. If the central bank increases the CRR, then the scheduled banks will have a lesser amount available in their disposal. CRR is the amount that the bank has, which cannot be invested anywhere or given as loans to the borrowers.Every scheduled bank is required to keep a cash balance with BB that cannot be less than the percentage of its total demand and time obligations that BB may from time to time specify by notification in the official Gazette. In accordance with its monetary policy goals, BB may additionally specify the process for maintaining a cash reserve. At present, the required CRR is 4% on bi-weekly average basis of the average total demand and time liabilities (ATDTL) with a provision of minimum 3.5% on daily basis of the same ATDTL. Banks are advised to follow the circular issued by Monetary Policy Department of BB in this regard. CRR is one of the most important tools for the Bangladesh Bank and is used mostly in controlling inflation/deflation and liquidity in the economy. Bangladesh Bank being the supreme banking body in Bangladesh and has all the rights to modify the CRR at any given time.
The
cash reserve ratio is particularly
useful in dealing
with the rate of inflation/deflation and liquidity in
the
country. If the central bank is of the opinion that there is too much liquidity
in
the economy, it will increase the CRR. This reduces
the banks‘ lending ability as they would be left with a lesser amount which can be used to issue loans and make investments. When this happens, the
spending would be reduced and thereby liquidity
and inflation in the economy drops. If the central bank sees that there is a liquidity
crunch, then it would reduce the CRR. This move would leave banks with more money at
disposal. This will result in the appreciation of the banks‘ lending power, and thereby, more borrowers
can avail loans. It will help in inflating the prices to some extent as people would have more money in
their hand for spending. Therefore, CRR is an extremely powerful tool in the
hands of BB, which can dictate the terms
in
the economy.
Components of Cash
Reserve:
At present,
banks are allowed to
maintain cash reserve with
local currency (Taka) only.
The day end balances of the Taka current accounts maintained with different offices of BB will be aggregated to compute the maintained cash reserve of the day. The balance so maintained shall
be un-encumbered in all aspect.
The encumbered
(lien against discounting
facility, etc.
and capital lien
in case of foreign banks) portion of the balance will
be deducted while computing both the maintained amount and excess of cash
reserve.
Banks failing to maintain CRR, is liable to pay a penalty to the Bangladesh Bank as per guideline. If a
bank fails to maintain the prescribed minimum CRR for a particular day, it has to pay a penalty of 5%
above the bank rate on
the
deficient/ shortfall amount for that particular day. This is
also
applicable for bi- weekly CRR.
That
is, bank has to
pay a penalty of 5% above
the bank rate on the shortfall amount.