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19 August, 2024

Statutory Liquidity Ratio (SLR):

 Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. The SLR is fixed by the BB and is a form of control over the credit growth in Bangladesh. The government uses the SLR to regulate inflation and fuel growth. Increasing the SLR will control inflation in the economy while decreasing the statutory liquidity rate will cause growth in the economy.

 

Every scheduled bank has to maintain assets in cash or gold or in the form of un-encumbered approved securities the market value of which shall not be less than such portion of its total demand and time liabilities as prescribed by BB from time to time. BB may also prescribe the procedure of determination of assets and liabilities and percentages of maintainable assets in different classes. 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 of conventional banks of their average total demand and time liabilities. Banks are advised to follow the circular issued by Monetary Policy Department of BB from time to time in this regard.

 

The SLR is fixed for the below mentioned reasons:

 

          To monitor the growth of bank credit.

          To guarantee commercial banks' solvency.

          To compel banks to buy bonds and other types of government securities.

     To stimulate demand and growth; this is accomplished by lowering the SLR to provide liquidity at commercial banks.

 

The minimum rate at which a bank can lend money to its customers is determined in large part by the SLR. This minimum amount is called the base rate. The Central Bank and other banks can become more transparent as a result. In order to limit bank credit, the SLR requirement is raised when inflation is high. On the other hand, during a recession, SLR requirement is lowered to increase bank credit.

 

If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Bangladesh Bank.Penalty will be charged at the prevailing Special Repo Rate on the amount by which the SLR falls short daily.

 

(i) Components eligible for calculation of Statutory Liquidity Reserve:


The eligible components for maintaining Statutory Liquidity Reserve are cash in tills (both local and foreign currency), gold, daily excess reserve (excess of Cash Reserve) maintained with BB, balance maintained with the agent bank of BB and un-encumbered approved securities, credit balance in Foreign Currency Clearing Account maintained with BB.

 

Daily excess of Cash Reserve (if any) will be calculated using the following formula:

 

Daily excess of Cash Reserve = (Day-end balance of un-encumbered cash maintained in Taka current accounts with BB – Required cash reserve on Bi-weekly average basis).

 

(ii) Guidelines for use of Foreign Currency from Foreign Currency Clearing Account for SLR

purpose:

 

Banks may use foreign currency from Foreign Currency Clearing Account maintained with BB for SLR purpose as long as there is credit balance in the account. However, no interest will be paid on the used portion of foreign currency. Forex Reserve and Treasury Management Department (FRTMD) of BB will credit interest on the balance held in the account as usual. After getting the certification from Department of Off-site supervision (DOS) regarding the actual amount of foreign currency used for SLR purpose, FRTMD will adjust (if required) the interest amount. Banks should take utmost care while reporting the use  of  foreign  currency  in  DB-5fc  statement  as  any  misreporting  regarding  the  amount  of  foreign currency used for SLR purpose will attract a penalty two times of the amount of interest already credited for the misreported amount along with reversal of the interest credited.

Cash Reserve Ratio (CRR)

 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.