Explore the Primary and Secondary Reserve Requirements, and the
Special Liquidity Facility: Key Tools Influencing Credit and Monetary Conditions.
Direct Monetary Instruments
Primary Reserve Requirement
The primary or cash reserve requirement is the principal direct monetary policy instrument used by the Central Bank to influence monetary conditions. All licensed financial institutions are required to maintain a fraction of their deposit liabilities in a non-interest earning cash reserve account with the Bank. By lowering or increasing this fraction, the Bank can increase or reduce liquidity in the banking system. This instrument, which was first introduced in 1966 for commercial banks, was extended to the non-bank financial institutions in 1981. The primary reserve requirement ratio currently stands at 10 per cent for commercial banks and 9 per cent for the non-banks. The Central Bank regularly monitors the cash balances of the banks and non-banks to ensure that these institutions meet their statutory requirements. There is a stipulated cash penalty for failure to adhere to the reserve requirements.
Secondary Reserve Requirement
Similar to the primary reserve requirement, this percentage represents the portion of prescribed liabilities that institutions must maintain at the Central Bank. The Secondary Reserve Requirement, occasionally imposed by the Central Bank on licensed banks and non-bank financial institutions, mandates holding a specified percentage of their prescribed liabilities as a secondary reserve, typically with remuneration.
Special Liquidity Facility
The Special Liquidity Facility is an additional measure, beyond the primary and secondary reserves requirements, where the Central Bank occasionally requests commercial banks to deposit a portion of their prescribed liabilities in an ‘interest-bearing facility at the Central Bank.