Term paper on

On the subject

Submitted to:
Dr. Hasina Sheykh
Professor, Department of Banking and Insurance
University of Dhaka

Submitted by:

Muhammod Mejanur Rahman ID: 51622001

H.M. Tariqul Islam ID: 51732053
Enayet Hossen ID: 51732025

Master of Professional Banking

Date of Submission: 10th November, 2018

University of Dhaka
Dhaka, Bangladesh
LETTER OF TRANSMITTAL

November 10, 2018

Dr. Hasina Sheykh

Professor, Department of Banking and Insurance
Faculty of Business Administration
University of Dhaka

Subject: Submission of Term paper on “Liquidity as percentage (%) Total Demand & Time Liabilities”

Dear Madam,

With due respect, it’s our pleasure to submit the Term Paper on “Liquidity as percentage (%) Total
Demand & Time Liabilities” for the course “Money & Banking” of Master of Professional Banking.

The Term paper has been prepared based on the available data/information in Bangladesh Bank
website regarding the captioned subject. We have extended our all out effort to prepare the Term
paper in accordance with the source data.

We shall be obliged if you grant the report.

Sincerely Yours,

Sd/-

Muhammod Mejanur Rahman : ID: 51622001

H.M.Tariqul Islam : ID: 51732053

Enayet Hossen : ID: 51732025

 Table of Content

Particulars Page
Introduction
CRR & SLR
Demand and Time Liabilities
Trend of Liquidity as % of Total Demand and Time liabilities (TDTL)
Graph: Liquidity as % of Total Demand and Time liabilities (TDTL)
Findings and Recommendation
Conclusion
References
Introduction:
Liquidity is a measure of the ease with which fractional reserve banks can meet the demand for
withdrawals by their depositors. This requires that banks maintain an adequate amount of cash on hand
or the ability to readily acquire such cash.

The liquidity management by Bangladesh Bank (BB) can be defined as the framework where set of
instruments and the rules are used to control the liquidity consistent with its ultimate objective focuses
on supporting the highest sustainable output growth while maintaining the price stability by targeting
M2 growth. The M2 target is attained by using indirect instruments under the framework of the reserve
money. After formulating a reserve money programme to achieve the desired level of M2, the actual
developments are monitored and required steps are taken accordingly. Reserve money, the operating
target of Bangladesh Bank, gives an indication of liquidity in the monetary system. BB tries to regulate
liquidity conditions consistent with overall monetary projection by adjusting the level of deposits of the
banks' with the Bangladesh Bank through its indirect instruments.

CRR & SLR:

CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to
keep/maintain with the central bank. This serves two purposes. It ensures that a portion of
bank deposits is totally risk-free and secondly it enables that central bank control liquidity in
the system, and thereby, inflation by tying their hands in lending money.

SLR
Besides the CRR, banks are required to invest a portion of their deposits in government
securities as a part of their statutory liquidity ratio (SLR) requirements. SLR restricts the bank’s
leverage in pumping more money into the economy. The SLR requirement is now 13% daily for
conventional banks and 5.5 % for Islamic Shari'ah-based banks and Shari'ah-based banking of
conventional banks of their average total demand and time liabilities.]

Demand and Time Liabilities:

For monetary policy purpose, the liabilities of banks are divided into two parts: i) demand
liabilities and ii) time liabilities:

i. Demand liabilities are those which are payable on demand. For example, current
deposit of a bank is its demand liability. Demand Liability is included in Narrow Money
(M1).
ii. Time liabilities are those which are payable on maturity of the liability. For example,
term deposit of a bank is its time liability. Both Demand Liabilities and Time liabilities are
included in Broad Money (M2).
Demand and time liabilities should include all on-balance sheet liabilities excluding the items
listed below:

a. Paid up capital and reserves;

b. Loans taken from BB;
c. Credit Balance in Profit and Loss account;
d. Inter-bank items;
e. Repo, Special Repo and any kind of Liquidity Support taken from BB.

Various items of demand and time liabilities which are reckonable for the computation of
required CRR and SLR are listed in Annex-1 of DOS Circular No. 1 dated 19 January 2014. The
items listed are generic in nature and are applicable for both Conventional and Islami banking.
A part of savings deposits is considered as demand liability and the rest amount is considered as
time liability. Presently, 9% of savings deposit is considered as demand liability and the rest 91%
is considered as time liability. According to annex-4 of 'Guidelines on Risk Based Capital
Adequacy (Revised Regulatory Capital Framework for banks in line with Basel-II, subordinated
debt will also be part of demand and time liabilities5 . (The item is not included in DOS Circular
No. 1 dated 19 January 2014).
Trend of Liquidity as % of Total Demand and Time Liabilities (TDTL):

Year-wise last 10 years trend are given below:

Year REQUIRED Maintained SLR Excess SLR

(%) (Liquid Asset) (Liquidity) %
2009 18.00 20.60 9.00
2010 13.00 23.00 6.00
2011 13.00 25.40 8.40
2012 13.00 27.10 9.90
2013 13.00 32.50 15.40
2014 13.00 32.70 15.70
2015 13.00 26.80 16.90
2016 13.00 22.90 12.70
2017 13.00 21.28 11.08
2018 13.00 21.06 9.74
Data Source : Bangladesh Bank’s website.

40

35

30

25
REQUIRED
20
Maitained SLR (Liquid Asset)
15
Excess SLR (liquitidy)
10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Graph: Liquidity as % of Total Demand and Time Liabilities (TDTL) of last 10 years.
Finding and Recommendation:

The Statutory Liquidity Requirement (SLR) is one of the quantitative and powerful tools of monetary
control of the central banks. Changes in SLR can have a marked effect on money and credit situation of a
country. If the central bank raises average reserve requirement of the commercial banks, this would
create a reserve deficiency or decrease in available reserve of depository institutions. If the banks are
unable to secure new reserves, they would be forced to contract both earnings and deposits which
would result in a decline in the availability of credit and increase the market interest rates. The reverse
would happen if the central bank lowers its reserve requirements. In other words Reserve Requirement
also regulates money creation ability of banks. When a bank makes investment/credit (after keeping
required CRR/SLR), it also creates matching deposit in some other account of the same bank or other
bank. The new deposit is again used to create investment/credit and the loop continues. Thus, banks
create money. The more banks have to keep reserve, the less ability they have to make
investment/lending and less money is created in the economy.

Conclusion:

This policy note has examined the SLR as a monetary policy instrument in Bangladesh. Although the SLR
experienced infrequent changes since the 1970s, evidence shows that the reduction in SLR produced
positive impacts on bank credit and investment especially prior to the 1990s. The direct credit control
policy was abandoned and since then Bangladesh Bank (BB) has been using open market operations
(OMOs), as indirect monetary policy instruments to control money supply and credit in Bangladesh. In
recent times, changes in SLR and CRR helped to reduce inflation. The SLR also helps to reduce interest
rate differentials which in turn help to increase investment and economic activity.

Improving liquidity conditions are also evidenced by the ratio of excess of SLR assets to Total Demand
and Time Liabilities (TDTL), often referred to as "excess liquidity," which continued to moderate through
December 2017 reaching 8.8 percent, but has since gradually increased to 9.2 percent in June 2018.
References:

 MPD Circular No. 1 dated 03 April 2018;

 MPD Circular No. 2 dated 10 December 2013;
 DOS Circular No. 1 dated 19 January 2014;
 MPD Circular No. 2 dated 03 April 2018;
 Article- 36 of the Bangladesh Bank Order, 1972;
 Section-33 of the Bank Company Act, 1991.