Center for Professional AdvancementFor monetary policy purpose, the liabilities of banks are divided into two parts: i) demand liabilities and ii) time liabilities.
According to Article 36 of the Bangladesh Bank Order 1972, every scheduled bank has to maintain Cash Reserve Ratio (CRR) in the form of 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. Presently, the required CRR is 6.50% on bi-weekly average basis and 6.00% on daily basis1.
According to section 33 of the Bank Company Act 1991, every scheduled bank has to maintain Statutory Liquidity Ratio (SLR) in the form of cash or gold or 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. 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 banks2.
CRR and SLR may be used to regulate money supply by central bank. When central bank increases CRR/SLR, banks have to keep more cash/gold/approved securities and it will have less money. As a result, money supply in the economy will decrease. Similarly, when central bank decreases CRR/SLR, banks have more money available and money supply will increase.
CRR /SLR, in other words Reserve Requirement, also regulates money creation ability of banks. When a bank makes investment/credit (after keeping required CRR/SLR), it also creates matching deposit in some other account of the same bank or other bank. The new deposit is again used to create investment/credit and the loop continues. Thus, banks create money. The more banks have to keep reserve, the less ability they have to make investment/lending and less money is created in the economy. The ability to create money by banking system, which is known as Money Multiplier, is inversely related with reserve (CRR/SLR) requirement. In simple terms, Money Multiplier is determined as under:
Money Multiplier = (1/ Reserve Requirement).
For example, if the reserve requirement is 20%, the money multiplier will be 5. If the reserve requirement decreases to 18%, the money multiplier will increase to 5.56.
Thus, CRR/SLR may be used to control money supply.
Demand and time liabilities should include all on-balance sheet liabilities excluding the items listed below:
Various items of demand and time liabilities which are reckonable for the computation of required CRR and SLR are listed in Annex-1 of DOS Circular No. 1 dated 19 January 2014. The items listed are generic in nature and are applicable for both Conventional and Islami banking.
A part of savings deposits is considered as demand liability and the rest amount is considered as time liability. Presently, 9% of savings deposit is considered as demand liability and the rest 91% is considered as time liability4 . According to annex-4 of 'Guidelines on Risk Based Capital Adequacy (Revised Regulatory Capital Framework for banks in line with Basel II, subordinated debt will also be part of demand and time liabilities5 . (The item is not included in DOS Circular No. 1 dated 19 January 2014).
1MPD Circular No. 1 dated 23 June 2014
2MPD Circular No. 2 dated 10 December 2013
3DOS Circular No. 1 dated 19 January 2014
4BRPD Circular No. 6 dated 24 June 2007
5Circulated vide BRPD Circular No. 18 dated 21 December 2014