SBP raises cash reserves requirement for banks to 6%

KARACHI: The central bank on Saturday increased the average cash reserves requirement (CRR) for banks to 6 per cent to contain monetary expansion and moderate domestic demand.

A statement issued by the State Bank of Pakistan (SBP) said it has decided to increase the average (CRR), to be maintained during a period of two weeks by scheduled banks, from 5 per cent to 6 per cent and minimum CRR to be maintained each day from 3 per cent to 4 per cent.

CRR is the amount of money that the banks are required to keep with the State Bank of Pakistan and is applicable on the demand and time liabilities with the tenor of less than a year.

The time liabilities with the tenor of more than a year would 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 policy settings, including the growth of monetary aggregates. In recent months, the 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 pressure on the rupee.

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

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

The waiver of CRR on time liabilities with the tenor of more than a year will encourage the 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 finance.