SBP enhances banks' CRR to 6pc

KARACHI: in order to contain the monetary expansion and moderate domestic demand, the State Bank of Pakistan (SBP) Saturday announced increase in Cash Reserve Requirement (CRR) for banks from 5 percent to 6 percent.

Cash Reserve Requirement is the amount of money that banks are required to keep with the State Bank of Pakistan and is applicable on demand liabilities and time liabilities with tenor of less than a year. Time liabilities with the tenor of more than one year shall continue to be exempted from maintenance of cash reserves.

According to the SBP, it has been decided to increase the average CRR, to be maintained during a period of two weeks by scheduled banks, from 5 percent to 6 percent and minimum CRR to be maintained each day from 3 percent to 4 percent.

At present, cash reserves are required to be maintained at an average of 5 percent of total of demand liabilities and time deposits with tenor of less than 1 year, during the reserve maintenance period; however, it is subject to a daily minimum requirement of 3 percent.

As per revised instruction, during the reserve maintenance period, cash reserves will be maintained at an average of 6 percent of total of demand liabilities and time deposits with tenor of less than 1 year; however, it is subject to a daily minimum requirement of 4 percent.

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The revised average Cash Reserve Requirement of 6 percent will be effective from November 12, 2021 whereas the revised daily minimum requirement of 4 percent will be effective from November 15, 2021, a circular issued by the SBP said.

With the economy recovering briskly from last year's acute Covid shock, there is a need to gradually normalize policy settings, including the growth of monetary aggregates. In recent months, real money supply growth has drifted above its trend.

Today's measure will moderate this growth as well as domestic demand, thereby helping to sustain the current economic recovery, achieve the government's medium-term inflation target, and reduce pressures on the rupee.

In addition, this measure is likely to have positive impact on deposit mobilization as the banks would be encouraged to generate more deposits to cope with additional liquidity requirements for their operations.

According to SBP, this would incentivize banks to offer better returns on deposits to attract these funds; thus, serving the SBP objective of encouraging savings.

Waiver of CRR on time liabilities with tenor more than a year will encourage banks to raise more long-term deposits, which will facilitate asset-liability matching and enable banks to extend long term loans for construction and housing financing.

Copyright Business Recorder, 2021