Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio is a provision of reserve requirement set by the central bank to its bank and financial institutions for maintaining some liquidity in the form of cash, government bonds or other convertible assets. It refers to the supplementary liquid reserve requirements of banks in addtion to CRR. At present, NRB has provisioned SLR 10% of their total domestic deposit liabilities for commercial banks.

SLR has three objectives:

• To restrict expansion of banks' credit,
• To ensure liquidity of banks and
• To increase banks' investment in aprroved securities.

The effect of an increase in SLR by Nepal Rastra Bank is the reduction in the lending capacoty of banks by pre-empting a certian portion of their DTL for government or other approved securities. It has a deflationary impact on the economy, not only by reducing the supply of loanable funds of banks but also by increasing the lending rates in the face of an increasing demand for bank credit and viceversa.

Cash Reserve Ratio (CRR)

CRR is the certain rate of amount of the cash that the bank and financial institutions should hold as reserves in the Central Bank. Currently in fiscal year 2018/19 Nepal Rastra Bank has decreased the CRR rate from 6% to 4% for the commercial banks. It refers to the cash that all BFIs are required to maintain with NRB as a certain percentage of their total deposit in local currency. Demand liabilities of a bank represents its deposits which are payable on demand of the depositors (i.e. current and saving deposits) and time liabilities refer to its time deposits which are repayable on the specified maturities. To meet these liabilities in time, a bank has to keep a regulatory cash reserve with NRB on the basis of daily average deposit. The BFIs that fails to maintain such reserves face monetary penalties based on the bank rate, the penalty rate increased for repeated violations. Decrease in the CRR increases loanable funds and reduces their dependence on call and term money market i.e call rate goes down. and vice-versa.