The State Bank of Pakistan (SBP) has announced that it has increased the average Cash Reserve Requirement (CRR), maintained during a period of two weeks by scheduled banks, from 5% to 6%.
In a statement on Saturday, the central bank also increased the minimum CRR to be maintained each day from 3% to 4%.
“CRR is the amount of money that banks are required to keep with the State Bank of Pakistan and it is applicable to demand liabilities and time liabilities with tenor of less than a year,” the SBP elaborated.
“Time liabilities with tenor of more than one year shall continue to be exempted from maintenance of cash reserves.”
“With the economy recovering briskly from last year’s acute Covid shock, there is a need to gradually normalise the policy settings, including the growth of monetary aggregates,” it said.
The central bank added that the real money supply growth drifted above its trend in recent months.
“This measure will moderate the growth as well as domestic demand and help sustain the current economic recovery, achieve government’s medium-term inflation target and reduce pressures on the rupee.”
In addition, this measure is likely to have a positive impact on deposit mobilisation as the banks will be encouraged to generate more deposits to cope with additional liquidity requirements for their operations.
“This will incentivise banks to offer better returns on deposits to attract funds and serve the SBP’s objective of encouraging savings,” the central bank stated.
It is pertinent to mention that the CRR waiver for time liabilities with tenor of more than one 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.
At present, the cash reserves are required to be maintained at an average of 5% of total demand liabilities and time deposits with tenor of less than one year, during the reserve maintenance period.
“However, banks are subject to a daily minimum requirement of 3%,” the SBP said.
The revised average CRR of 6% shall be effective from November 12, 2021 whereas the revised daily minimum requirement of 4% shall be effective from November 15, 2021.
Published in The Express Tribune, November 14th, 2021.