The 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 raises its CRR, less money is available to banks. CRR is the amount the bank cannot be deposited anywhere or loaned to borrowers. All banks are obliged to keep their Cash balance with BB
In addition to monetary
policy objectives, the BR can also determine processes for maintaining cash
reserves, and currently, the required CRR is 4% for the bi-weekly average of
gross demand and time Liabilities with a provision of at least 3.5% on a daily
basis of the same Average of gross demand and time liabilities.
Every scheduled bank
has to maintain a balance in cash with BB the amount of which shall not be less
than such portion of its total demand and time liabilities as prescribed by BB
from time to time, by notification in the official Gazette.
The
Statutory Liquidity Ratio or SLR is the minimum deposit
percentage a commercial bank must hold in the form of cash, gold, or other
securities. It's actually a reserve obligation banks are expected to hold before
granting credit to customers.
The
Statutory Liquidity Requirement (SLR) is one of the
quantitative and powerful tools of monetary control of the central banks.
Changes in SLR can have a marked effect on the money and credit situation of a
country. If the central bank raises the average reserve requirement of commercial
banks, this would create a reserve deficiency or decrease in the available
reserve of depository institutions. If the banks are unable to secure new
reserves, they would be forced to contract both earnings and deposits which
would result in a decline in the availability of credit and increase the market
interest rates. The reverse would happen if the central bank lowers its reserve
requirements.
At present, the
required SLR is 13% daily for conventional banks and 5.5% daily for Islamic Shari'ah-based
banks and Islamic Shari'ah-based banking or conventional banks of their average
total demand and time liabilities. Banks are advised to follow the circular
issued by the Monetary Policy Department of BB from time to time in this
regard.
Cash Reserve Ratio
(CRR) and Statutory Liquidity Ratio (SLR) are maintained in the banking sector
to fulfill certain objectives and ensure the stability and soundness of the
banking system. Here's an explanation of why CRR and SLR are maintained:
1. Cash Reserve Ratio (CRR): CRR is the portion of a bank's total
deposits that it is required to hold in the form of cash reserves with the
central bank. It is set by the central bank and serves the following purposes:
a. Control Money Supply: By adjusting the CRR, the central bank can
influence the money supply in the economy. If the central bank wants to reduce
liquidity or control inflation, it can increase the CRR, thereby reducing the
funds available for lending by banks. On the other hand, if the central bank
wants to stimulate economic growth, it can lower the CRR, increasing the availability
of funds for lending.
b. Ensuring Solvency and Stability: Maintaining a certain level of
cash reserves helps banks meet their withdrawal obligations to depositors. It
acts as a safeguard against bank runs or sudden withdrawal demands, ensuring
the solvency and stability of banks.
c. Monetary Policy Transmission: CRR plays a crucial role in the
transmission of monetary policy. When the central bank adjusts the CRR, it
affects the cost of funds for banks. If the CRR is increased, banks have to
hold more funds as reserves, reducing the funds available for lending and potentially
increasing lending rates. Conversely, a decrease in the CRR can lead to lower lending
rates, stimulating borrowing and economic activity.
2. Statutory Liquidity Ratio (SLR): SLR is the portion of a bank's total deposits that it is required to maintain in the form of specified liquid assets, such as government securities, gold, or cash. Similar to CRR. SLR serves the following purposes:
a. Liquidity Management: SLR ensures that banks maintain a certain
level of liquidity to meet their short-term obligations and unexpected
liquidity demands. It acts as a buffer to handle unforeseen events and maintain
the stability of the banking system.
b. Safety and Stability: By requiring banks to invest in safe and
liquid assets, SLR ensures that banks have a cushion of assets that can be
easily converted into cash if needed. This helps in mitigating liquidity risks
and promoting financial stability.
c. Credit Flow Regulation: SLR also influences the credit flow in the
economy. When banks invest a significant portion of their deposits in
government securities to meet the SL.R requirement. it reduces the funds
available for lending to the private sector. The central bank can adjust the
SLR to control credit expansion or contraction, depending on the monetary
policy goals.