Finance Malaysia Blogspot: What is Statutory Reserve Requirement (SRR)?

Everyone is buzzing about SRR lately, since Bank Negara Malaysia's statement which stated its intention to raise SRR in the near future. Actually, what is SRR? And, what is the effect of higher SRR imposed? Why BNM using SRR right now? Finance Malaysia hopes to clear everyone's doubt and would appreciate if you can share this out.

What is SRR?

Statury Reserve Requirement is a monetary policy instrument available to Bank Negara Malaysia (BNM) for the purposes of liquidity management. Effectively, banking institutions namely commercial banks, merchant/investment banks and Islamic banks are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate.

Why BNM uses the SRR as its "tool"?

Since SRR is available to BNM to manage liquidity and hence credit creation in the banking system, it was used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived to be large and long-term in nature. Currently, BNM believes that our banking system is lack of liquidity, thus it may raised the SRR to "store" more money in banks.

Effective 1 March 2009, the SRR rate for banking institutions is 1% of EL. As of 1st September 2007, the EL base consists of ringgit denominated deposits and non-deposit liabilities, net of interbank assets and placements with BNM.

Previous adjustments to the SRR rate

What is the effect of higher SRR?

As explained above, higher SRR means that banks in Malaysia will have to keep more money as their reserve. This translates into lower loans growth for banks. Normally, banks wiould imposed stricter loan approvals for borrowers, because less funds are available for lending.

Normally, higher SRR translates into lower profit growth for banks. Banking stocks are the hardest hit. But, raising the SRR from a record low of 1% is unlikely to have any significant impact on credit growth. Finance Malaysia see this as an opportunity to accumulates banking stocks if they are battered down because of higher SRR.