Cash Reserve Ratio (CRR)
Cash Reserve Ratio is the percentage of deposits made by the banks to the NRB. The ratios should be maintained by the banks on a fortnightly basis in the form of cash. The percentage shall be fixed by the NRB in relation to Net Demand and Time Liabilities (NDTL). Demand Liabilities simply means the banks has to pay on demand like demand deposits (eg. amount of saving accounts, current accounts) .Whereas, time liabilities (deposits) means the deposits which is to be paid by the banks on maturity such as Fixed Deposits. As per the Monetary Policy 2019/20, the CRR for class A, B and C banks and financial institutions shall be maintained at 4%.But according to the circular no 14/076/77 dated 2077.01.16 issued by the NRB , the CRR ratio has been reduced to 3% .No any interest is earned by the banks and financial institutions after maintaining such amount with the Nepal Rastra Bank. This is also the powerful tool to control the inflation and flow of money in the country.
Example:
If a deposits of the bank is Rs.100, then it shall have to maintain Rs.4 to the NRB when the CRR is 4% of NDTL. And the banks can use only Rs.96 for lending and other investments.
Statutory Liquidity Ratio (SLR)
SLR is the ratio of deposits made by the bank itself in the form of liquid assets such as government bonds, cash, gold and other securities. The objective of the SLR is to maintain the liquidity in the bank and to overcome any kind of crisis in the bank if arises. The banks and financial institutions can earn the amount of interest on the money parked as SLR. It can also be used to handle the sudden increase in demand for the amount from the depositor. According to the Monetary Policy 2019-20, Statutory Liquidity Ratio (SLR) is to be maintained at 10%, 8% and 7% by class A, B and C BFIs respectively.
The Monetary Policy may change the rates of SLR & CRR on yearly basis. We can study the policy through https://www.nrb.org.np/contents/uploads/2020/04/Monetary_Policy_in_English-2019-20_Full_Text-new.pdf
Examples:
- When the SLR is 10%, then the banks has to maintain Rs.10 from the NDTL of Rs.100.And only the remaining amount of Rs.90 can be used for the lending and other banking purposes.
- When the total deposits of the bank is Rs.100 and the CRR and SLR are to be maintained as 4% and 10% respectively. Then Rs.4 is to be deposited with NRB as CRR and Rs.10 is to be maintained as SLR by the bank itself. Hence only Rs. 100-(10+4) is to be used for lending and other banking purposes.
How these ratios controls Inflation and money flows?
These rates are being changed yearly by the Monetary Policy issued by the Nepal Rastra Bank. The objective of changing these rates are usually to control the inflation and the money flows in the economy of the country.
If the NRB increases the SLR and CRR, then more percentage of NDTL has to be maintained by the banks and financial institutions. Due to which it cannot invest more money through lending and other investments. When the less amount is only being used for lending business, it is obvious that banks and financial institutions will increase the rate of interest for lending mainly to generate more revenue. And where there is more interest rates in lending, people/customers will not opt for loan due to high rate of interest. As the consequences, people won’t spend more money in the market and there will be the less demand in the market. Henceforth, the inflation rate would decrease due to the less money supply and less demand in the market. In this way, NRB uses the CRR and SLR ratios to control the money flows. Likewise, the exact opposite would be the case when the NRB wants to increase the flow of money by reducing the rates of SLR & CRR.
Fines & Penalties for not maintaining the ratios
In case of CRR
In case the deposit falls short, following fines shall be imposed:
- For the first time of shortfall, fees of an amount which is equal to the prevailing bank rate on such shortfall would be charged;
- For the second time of maintaining the reserve, at the rate of 1.5% of the existing bank rate on such shortfall amount;
- For the third and successive times of shortfall thereafter, at the rate of double of the percentage of the existing bank rate on such shortfall amount.
For the purpose of calculation of times, separate times shall be calculated on every fiscal year basis.
In case of SLR
In case the statutory liquidity ratio falls short, fine shall be imposed as follows:
- For the first time of shortfall, at the percentage of prevailing bank rate for the amount fallen short;
- For the second time of shortfall, at double of the percentage of prevailing bank rate for the amount fallen short;
- For the third and whatsoever time thereafter, at triple of the percentage of prevailing bank rate for the amount fallen short.
For the purpose of calculation of times, separate times shall be calculated on every fiscal year basis.
The fines and penalties for not maintaining the ratios have been extracted from the Unified Directive, 2076 https://archive.nrb.org.np/bfr/circular/2076-77/Directives–Unified_Directives_2076-new.pdf
Thank You!
For more updates, please stay in touch with us, https://camunchnepal.com/
We would love to discuss in this topic in https://camunchnepal.com/forums/
