In light of excess liquidity in the financial system, the Royal Monetary Authority (RMA) had issued a notification to revise the Cash Reserve Ratio (CRR) of financial institutions from the existing 5 percent to 10 percent.
The notification reads, due to persistent liquidity build-up in the financial system, the “RMA board of directors has decided to increase the Cash Reserve Ratio from the existing five percent to 10 percent.”
The revision will be effective next month. Cash Reserve Ratio is the minimum reserve requirement that a bank must set aside from its total deposit base. It is usually parked with the central bank and maintained in cash.
According to local bankers, CRR is basically a monetary tool used by the central bank to monitor and regulate liquidity in the financial system. Whenever there is excess liquidity, central banks usually increase the CRR limit and when banks face liquidity crunch, the ratio is lowered.
The move to increase CRR to 10 percent means, banks will have to set aside more money from its total deposit base. In other words, excess liquidity in the financial system will be mopped up to the same extent at which the CRR has been increased.
Cash Reserve Ratio was reduced to one of the lowest at five percent from 20 percent in the face of extreme liquidity crunch the banks experienced in 2012. Today, however, most financial institutions are experiencing excess liquidity as a result of decrease in economic activity that has also led to decrease in demand for loans.
Financial institutions in the country had recorded excess liquidity almost to the tune of Nu. 20B as of January.
While local economists and the Opposition had claimed that there was excess liquidity in the system, the government has refused to acknowledge the claim saying most of the deposits lying in the banks were short-term deposits, which the banks cannot lend.
