Sunday, December 28, 2008

About the Statutory Reserve Requirement (SRR)

Effective 1 December 2008, Bank Negara (BNM) reduced the Statutory Reserve Requirement (SRR) by 50 basis points from 4% to 3.5%, together with the reduction of Overnight Policy Rate (OPR) from 3.5% to 3.25%. The last adjustment to SRR rate was made 10 years ago, from 6% to 4% effective 16 September 1998.

The SRR is a monetary policy instrument available to BNM to manage liquidity and hence credit creation in the banking system. It is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by BNM to be large and long-term in nature.

SRR is the amount of money set aside by banks (all commercial, merchant, investment, islamic banks) to be placed in their Statutory Reserve Accounts with BNM with zero interest. By lowering the SRR, the banks will have a reduced cost of funds, and can therefore help to preserve their profit margins by lending out the liquidated money and earn interest.

A reduction in SRR will inject a certain amount of liquidity into the financial system, which is expected to be lend out by the banks to finance more economic activities in the market. The recent move of 50 basis points SRR reduction by BNM is expected to release about RM2.7~3 billion ringgit back to the bank system.

Together with the 25 basis points reduction to the OPR at the same time, it is expected to have positive impact to the economy as the bank can now lend out more money to earn interest, and the business and consumer public can also borrow money from the bank with a lower interest rate following the reduction of OPR for consumption or investment purposes.

Click here to learn more about SRR.


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