What is CRR and what are the components of Cash Reserve? What is the Cash Reserve Ratio? How do commercial banks maintain CRR?

 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 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 the Central Bank.

 In addition to monetary policy objectives, the BB can also determine processes for maintaining cash reserves. 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 ATDTL.

 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.

 CRR is one of the following: Bangladesh Bank’s primary tool mainly used to control inflation/deflation economic liquidity. Bangladesh Bank is the top banking institution in Bangladesh and has it Right to amend the CRR at any 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. CRR is extremely powerful tool in the hands of BB, which can dictate the terms in the economy.

 Components of cash reserve:

In the context of Bangladesh Bank (BB), the components of the Cash Reserve Ratio include the following:

Demand and Time Liabilities: The CRR is calculated based on a certain percentage of both demand and time liabilities of banks. Demand liabilities include deposits that are payable on demand, such as current account deposits. Time liabilities include deposits with a specific maturity period, like fixed deposits.

Cash Balances with the Bangladesh Bank: Banks are required to maintain a certain percentage of their demand and time liabilities in the form of cash balances with the Bangladesh Bank. At present, banks are allowed to maintain cash reserves with local currency only. The day-end balances of Taka's current accounts maintained by different BB offices will be aggregated to compute the maintained cash reserve for the day.

Calculation and maintenance:

The Cash Reserve Ratio is expressed as a percentage of eligible liabilities. The ratio is set by the central bank, and banks are required to maintain this reserve in the form of cash with the central bank. This reserve is non-interest-bearing. The balance so maintained shall be unencumbered in all aspects. 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.

Regulatory Tool: The CRR is used as a monetary policy tool to control liquidity in the banking system. By adjusting the CRR, the central bank can influence the amount of money available for lending in the economy. If the CRR is increased, banks have to keep more funds with the central bank, reducing the amount available for lending and vice versa.

Monetary Policy Transmission:

Changes in the Cash Reserve Ratio affect the money supply and consequently, interest rates. It is a tool through which the central bank can influence the cost and availability of credit in the economy, thereby impacting inflation and economic growth.

It is important to note that the specific details, such as the percentage of CRR and types of liabilities subject to the ratio, can vary between countries and are determined by the central bank’s monetary policy framework. In the context of Bangladesh Bank, the specific guidelines and regulations related to the Cash Reserve Ratio will be outlined in the central bank’s policies and circulars.