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Any cut in SLR will need Banking Act amendment

BS Banking Bureau

Talks about a cut in savings rate, cash reserve ratio and bank rate are thick in the air.

Technically, the Reserve Bank of India can bring down the CRR to 3 per cent, the minimum stipulated level, but the statutory liquidity ratio cannot be brought down any further from the current level of 25 per cent unless the government amends the Banking Regulation Act.

One of the major handicaps of the banking industry is the high reserve requirements, driven largely by the government's insatiable appetite for market borrowing. This is a drag on banks' profitability.

RBI governor Bimal Jalan's monetary policy has a two-fold objective: creating adequate liquidity in the system and keeping the interest rates soft. It has been largely successful in achieving the twin objectives.

It is another matter that the corporates are not forthcoming to lift credit as there is virtually no economic activity and banks are rushing to buy gilts. On the foreign exchange front, it still believes in controlling the market with no signs of capital account convertibility in the horizon.

Here is a snapshot of the monetary policies followed by the central banks of some of the emerging markets and our neighbouring countries:

Bank Indonesia: The monetary policy is implemented by setting an operational target, the base money, and followed by close monitoring on the development of the indicators, which can affect the price and exchange rate of the rupiah.

Control over indicators are conducted through indirect monetary instruments of open market operations, discount rate setting and minimum reserve requirement setting.

At present, the minimum reserve requirement is 5 per cent of bank's third-party liability, which is kept in the respective bank's account in

Bank Indonesia: Since August 1999, Bank Indonesia has been following a free float system. In order to maintain a stable exchange rate, it performs sterilisation in foreign exchange market sometimes, especially during an irregular fluctuation of exchange rate.

Bank of Korea: Bank of Korea imposes reserve requirements on the deposit liabilities of banking institutions. The ratios of reserve requirements to deposit liabilities may not exceed 50 per cent but when an expansionary policy is followed banks are required to maintain reserves as much as 100 per cent against any increase in their deposits.

Reserves are held in the form of deposits with the Bank of Korea, but part may also be held as vault cash in the form of banknotes to a level determined by the Monetary Policy Committee (currently 35 per cent).

Reserves against deposit liabilities held by banks in the Bank of Korea may be used for the settlement of interbank balances.

As of September 2000, the general reserve requirement ratio stood at 5 per cent, while a lower ratio of 1­2 per cent applied to a few long-term time and savings deposits.

Hong Kong Monetary Authority: The primary monetary policy objective of the Hong Kong Monetary Authority is to maintain exchange rate stability within the framework of the linked exchange rate system through sound management of the exchange fund, monetary operations and other means.

The linked exchange rate system, established in 1983, in essence is a currency board system, which requires both the stock and the flow of the monetary base to be fully backed by foreign reserves. Any change in the size of the monetary base has to be fully matched by a corresponding change in the foreign reserves.

The internationally accepted capital adequacy framework proposed by the Basle Committee on Banking Supervision in 1988 has been applied in Hong Kong.

The consolidated CAR for locally incorporated institutions as a whole was 18.8 per cent at the end of 1999, well in excess of the minimum international standard of 8 per cent set by the Basle Committee.

Banks in Hong Kong are required to meet a minimum monthly average liquidity ratio of 25 per cent.

Bank of Thailand: Thailand follows the managed-float exchange rate regime of which the value of the baht is determined by market forces to let the currency moves in line with economic fundamentals. The Bank of Thailand intervenes in the market only when necessary in order to prevent excessive volatilities and achieve economic policy targets.

Its policy target set the core inflation at 0-3.5 per cent. Under the inflation targeting framework, the Bank of Thailand sets the 14-day repurchase rate as key policy rate and signals a shift in monetary policy stance through a change in the announced rate.

The main objective of monetary policy is price stability by keeping core inflation within target.

Bangladesh Bank: Under the new interest rate policy, all deposits rates are decontrolled. Lending rates are all freely determined by the market except for exports.

The policy on capital adequacy - framed on the lines of recommended by the Basle Committee on banking supervision - requires scheduled banks to maintain at least 8 per cent of off-balance sheet risk and risk in different types of assets as capital.

In March 1994, Bangladesh taka was declared convertible for current transactions. However, since resident owned capital is not freely transferable abroad (taka is not yet convertible on capital account), some current settlements beyond certain indicative limits are subject to bonafides check.

Adjustments in exchange rates are made keeping in view the trends of real effective exchange rate index based on a trade weighted basket of currencies of major trading partners of Bangladesh and the trends of other important internal and external sector indicators.

The exchange rate for Bangladesh taka in Bangladesh Bank's transactions with scheduled banks are notified by Bangladesh Bank with the consent of the government.

State Bank of Pakistan: Every scheduled bank in Pakistan is required to maintain with the State Bank of Pakistan a balance the amount of which shall not at the close of business or any day be less than such percentage of time and demand liabilities in Pakistan as may be determined by State Bank.

At present, the requirement is 5 per cent on weekly average basis subject to daily minimum of 4 per cent of time and demand liabilities .

They are also required to maintain in 15 per cent (excluding 5 per cent statutory cash reserve) of the total of its time and demand liabilities in cash, gold or un-encumbered approved securities valued at price not exceeding "the lower of cost or the current market price".

All banks operating in Pakistan are required to maintain capital and un-encumbered general reserve, the value of which is not less than 8 per cent of their risk weighted assets. Additionally they are also required to maintain a minimum paid up capital of Rs 500 million.

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