Friday, February 3, 2023

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CB to temporally do away with liquid assets requirement for banks

In a desperate move of using monetary tools to ease the liquidity conditions in banks, the Central Bank issued fresh directions allowing them to temporarily do away with the requirement to report the Statutory Liquid Assets Ratio (SLAR) separately for domestic and off-shore banking units and instead allowed reporting the ratio on a consolidated basis, effective from December.

The licensed commercial and specialized banks are required to maintain a minimum of 20 percent and a maximum of 40 percent of their adjusted liabilities in liquid assets, which typically are parked in Treasury bills and bonds.

However, in a Banking Act Direction issued recently, the Monetary Board has taken a decision to allow the licensed commercial banks “to maintain liquid assets of an amount not less than 20 percent of total adjusted liabilities, on a consolidated basis for the overall bank, until further notice”.

Hence, the circulars thus far in effect stipulating the requirement to maintain the SLAR separately for the Domestic Banking Unit and Off-Shore Banking Unit are temporarily deferred by the latest Direction issued.

The new instructions on the banks’ liquidity came just days after Central Bank Governor Dr. Nandalal Weerasinghe identified the shortfall in the rupee liquidity in the banking system as one of the reasons for the prevailing higher than desired level of short-term interest rates in the market.

Thus, he said he would intervene to ease the liquidity condition in the banking system. “In the next couple of weeks, we will try to address this situation in terms of liquidity as the first step of stabilizing the short-term interest rates,” he added.

The Central Bank is under tremendous pressure to ease the current elevated level of interest rates and specially Dr. Weerasinghe became a lightning rod, receiving severe criticism for suffocating the economy.

However, the Central Bank has made reining in runaway inflation as its top priority, as maintaining price stability is the primary mandate of any central bank.

While its actions have begun to generate results, with the country entering a possible disinflation path in October, after inflation peaking just under 70 percent in September, these levels of inflation do not support businesses and households to engage in their usual economic activities.

Hence, the Central Bank’s actions in bringing inflation down to an acceptable level of 4-6 percent take precedence over everything else to create conditions conducive to do business, create jobs and generate economic well-being by preserving household income.

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