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Abstract:

Bangladesh Bank instructed the scheduled banks to strictly maintain cash reserve requirement
and statutory liquidity ratio. Currently the conventional banks are maintaining the SLR at 19
per cent, including the CRR, and the Shariah-based Islamic banks maintain 11.50 per cent SLR,
also including the CRR. But from now on the banks have to maintain the SLR and CRR
separately. As per the new circular, the required CRR will be 6.0 per cent on bi-weekly average
basis of the average total demand and time liabilities with a provision of minimum 5.5 per cent
on daily basis of the same ATDTL. The required SLR will be 13 percent daily for conventional
banks and 5.5 percent daily for Islamic Shariah-based banks and Islamic Shariah-based banking
of conventional banks of their average total demand and time liabilities. Department of Off-Site
Supervision of BB issued a circular in this connection on Sunday asking the chief executives of
all scheduled banks to comply with the new procedure of the CRR and the SLR from the
stipulated timeframe. At present, banks are allowed to maintain cash reserve with local
currency Bangladesh Taka only.

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1.0- Introduction:

Cash Reserve Ratio and Statutory Liquidity Ratio All scheduled banks in Bangladesh have to
maintain Cash Reserve Ratio and Statutory Liquidity Ratio in Compliance with the instructions
given in clause (1) of Article 36 of Bangladesh Bank Order, 1972 and clause (1) of section 33
of Bank Company Act 1972 '' respectively. Pursuant to the recent amendment of section 33 of
Bank Company Act 1991 and in order to facilitate the maintenance of CRR and SLR by the
scheduled banks, and to clarify some related topics the following instructions are being issued:

2.0- Cash Reserve Ratio and Statutory Liquidity Ratio:


All scheduled banks in Bangladesh have to maintain Cash Reserve Ratio and Statutory
Liquidity Ratio in Compliance with the instructions given in clause (1) of Article 36 of
Bangladesh Bank Order, 1972. In recent times, changes in SLR and CRR helped to reduce
inflation to some extent in some years. Since the 1990s, Bangladesh Bank has used open market
operations, more frequently rather than changes in the Bank Rate and SLR as instruments of
monetary policy in line with its market oriented approach. The CRR and SLR for scheduled
banks are used only in situations of drastic imbalance resulting from major shocks.

2.1-Cash Reserve Ratio:

Every scheduled bank has to maintain a balance in cash with Bangladesh Bank the amount of
which shall not be less than such portion of its total demand and time liabilities as prescribed
Bangladesh Bank by from time to time, by notification in the official Gazette.

Bangladesh Bank may also prescribe the procedure of maintenance of cash reserve pursuant to
its monetary policy objectives. At present, the required CRR is 6% on bi-weekly average basis
of the average total demand and time liabilities with a provision of minimum 5.5% on daily
basis of the same.

2.1.1-Component of CRR:

At present, banks are allowed to maintain cash reserve with local currency 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 portion of the
balance will be deducted while computing both the maintained amount and excess of cash
reserve.

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2.2-Statutory Liquidity Ratio:
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.

Bangladesh bank 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.

2.2.1-Components of SLR:

The eligible components for maintaining Statutory Liquidity Reserve are:

1. Cash in tills both local and foreign currency.


2. Gold.
3. Daily excess reserve excess of Cash Reserve maintained with BB.
4. Balance maintained with the agent bank of BB.
5. Un-encumbered approved securities as defined section 5 clause 'ka' of Bank Company
Act, 1991. The clause refers to clause a, c and d of section 20 of the Trusts Act, 1882.

Credit balance in Foreign Currency Clearing Account maintained with Bangladesh Bank.

2.2.2-Daily excess of Cash Reserve 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).

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2.2.3-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.

Foreign Reserve and Treasury Management Department of BB will credit interest on the
balance held in the account as usual. After getting the certification from Department of Off-site
supervision regarding the actual amount of foreign currency used for SLR purpose, FRTMD
will adjust 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.

3.0-Computation of Demand and Time Liabilities:

For the purpose of maintenance of CRR and SLR, demand and time liabilities should include all
on-balance sheet liabilities excluding the items listed below:

Paid up capital and reserves;

Loans taken from BB;

Credit Balance in Profit and Loss account;

Inter-bank items;

Repo, Special Repo and any kind of Liquidity Support taken from BB.

4.0-Maintenance of CRR and SLR:

Banks shall submit hard copies of the monthly statements of "Maintenance of CRR" along with
the soft copies of others regarding monthly position of maintenance of CRR and SLR in the
newly prescribed formats to Department of Off-site Supervision within the 10th of the
following month. The Reporting Formats attached with DOS Circular Letter No.05/2008 has
been amended and the new formats will be effective from February 01, 2014. The soft copies of
the formats are available for collection from DOS.

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4.1-Penalties:

Penal Interest of Bank Rate is plus 5% and Penalty will be charged according to the instructions
of Bangladesh Bank Order, 1972 and CRR related issues.

Penalty will be charged at the prevailing Special Repo Rate on the amount by which the SLR
falls short daily.

Delay submission of statement regarding maintenance of CRR and all other statements
regarding maintenance of SLR will attract daily penalty as stated in clause (6) of Article 36 of
Bangladesh Bank Order, 9* 1972 and clause (11) of section 109 of respectively.

4.2-Effectiveness:

The instructions of this circular will become effective from February 01, 2014. Accordingly,
DOS Circular Letter No.17/2011and DOS Circular Letter No.24/2011 shall be considered void,
and DOS Circular Letter No.05/2008, where applicable, shall be considered amended, from
February 01, 2014.

5.0-Purpose of CRR/SLR:
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.
Moreover, CRR/SLR also regulates money creation ability of banks. If CRR/SLR is increased,
the money creation ability of banks decreases and vice versa. Thus, CRR/SLR may be used to
control money supply.

5.1-Solvency of Banks:

CRR/SLR increases solvency of banks. CRR/SLR reserves can be used to make payment
against the liabilities by a bank in the extreme case when it is running out of fund but cannot
manage it from other sources.

5.2-Sale of Government bonds:

Maintenance of SLR in approved securities ensures investment by banks in government bonds.

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6.0-CRR & SLR Management:
Bangladesh Bank can vary CRR between 3% CRR is set according to the guidelines of the
central bank of a country. It is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the central
bank. Cash Reserve Ratio & Current CRR rate is 5%.

The higher the reserve requirement is set, the less funds banks will have to loan out, leading to
lower money creation and perhaps ultimately to higher purchasing power of the money
previously in use.CRR specifications give greater control to the central bank over money
supply. Commercial banks have to hold only some specified part of the total deposits as
reserves. This is called fractional reserve banking. The amount specified as the CRR is held in
cash and cash equivalents, is stored in bank vaults or parked with the Central bank of
Bangladesh.

7.0-Major difference in CRR & SLR:


Return on deposit, Banks dont earn any returns from the money parked in the form of
CRR. However, banks can earn returns from SLR.
While banks themselves maintain SLR in liquid form CRR is with Central maintained
as cash.
Intend, SLR is intended to make banks invest in government securities. CRR is intended
to maintain the purchasing power of money in order to curb inflation.CRR is used to
control inflation.
SLR restricts the banks leverage in pumping more money into the economy. On the
other hand, CRR is the portion of deposits that the banks have to maintain with
the Central Bank to reduce liquidity in banking system. Thus CRR controls liquidity in
banking system while SLR regulates credit growth in the country.
While SLR is to be maintained with the banks only, CRR is to be kept with Central
Bank.
Banks do not earn any interest on CRR while they earn interests on SLR.CRR can be
maintained only in terms of cash.
SLR can be maintained in terms of cash, gold and govt. Approved securities.
. Lowering of reserve requirement increases the resources available with a bank to lend.
But they cannot be merged.
CRR- It is cash reserve ratio. It is the amount bank has to keep with Central Bank. It is
a liability for the bank. It is currently 6.5% of net demand and time liability. It can only
be maintained in cash.
SLR- It is statutory liquidity ratio. It is the amount bank has to keep with itself. It is
currently 19.5% of NDTL. It can be maintained in cash, gold and securities.

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8.0-List of Demand and Time Liabilities:

Various items of demand and time liabilities which are reckonable for the computation of
required CRR and SLR are listed below. The items listed are generic in nature and are
applicable for both Conventional and Islamic banking.

8.1-Demand Liabilities:

All Current Accounts except from banks.

All Cash Credit Accounts.

Demand Portion of savings bank Accounts.

Overdue Fixed Deposits accounts.

Call Deposits accounts other than from banks.

Unclaimed balance accounts.

Interest accrued on above accounts.

All other Deposits payable to public on demand.

Foreign Currency Deposit account.

Unsold balance of NFCD account.

Convertible Taka account.

Other Demand Liabilities:

Margin on L/ cs.

Margin on Guaranties.

Lockers Key Security Deposits.

Unclaimed Dividend/ Dividend Payable

Credit Balance and adjustment account.


Security Deposit accounts (amount deposited by Supplier of
stationery and furniture etc. As security).

Sundry Deposits accounts.

Any other miscellaneous deposits payable on demand.

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8.2-Time Liabilities:

o Fixed Deposits from Customers other than from banks.

o Special Notice Deposits other than those from other banks.

o Time portion of the savings bank deposits.

o Short term Deposit accounts.

o Recurring Deposits

o Interest accrued on all above accounts.

o Employees' Provident Fund Accounts.

o Staff Pension Fund.

o Employees' Security Deposits.

o Staff Guarantee or Security Fund.

o Contribution towards Insurance Fund.

o Any other miscellaneous liabilities payable on notice or after a


specified period.

o Margin account- Foreign Currency.

o Liabilities towards Foreign banks/ Correspondence bank

o Bi-lateral trade liabilities.

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Conclusion:

The important reason is that CRR has to be maintained in cash while SLR can be maintained
either in cash or in assets that Bangladesh Bank suggests. Banks dont earn any returns from the
money parked in the form of CRR. Both SLR and CRR are considered as reserves. A higher
reserve requirement through, says CRR and SLR, makes banks deposits relatively safe but at
the same time increases the effective cost of their funds. This is because a certain portion of
their deposits are always redeemable. Actually 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. Moreover, CRR/SLR also regulates money
creation ability of banks.

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References:

Bangladesh bank Web side

Google search

https://www.bb.org.bd/mediaroom/circulars/dos/jan192014dos01e.pdf

http://www.iknowledgebankbd.com/sm/Fund-Management/5_sms

http://www.centralbanknews.info/2017/01/bangladesh-holds-rates-sees-over-7.html

https://businessnews-bd.net/bb-to-ask-banks-to-report-on-crr-slr-separately/
Alexander, William E., Toms J. T. Balio, and Charles Enoch, 1995, The Adoption of
Indirect Instruments of Monetary Policy, IMF Occasional Paper No.126, Washington:
International Monetary Fund.
Buzeneca, Inese and Maino, Rodolfo 2007, "Monetary Policy Implementation: Results
from a Survey", IMF Working Paper, WP/07/7WP/07/7, January, pp.1-43.
Jaffee, D. and T. Russell 1976, "Imperfect Information, Uncertainly, and Credit
Rationing," Quarterly Journal of Economics, 90, 651-666.
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