Reserving Costs

Central Bank is seeking more flexibility to cut commercial bank
quote s statutory reserve ratios in the future and also pay interest on reserves if it reaches extraordinary levels. rn

rnIn a soon to be introduced amendment to the Monetary Law Act, the current floor levels for reserves will be taken off giving Central Bank discretion to reduce reserve ratios in the future.rn

rnMrs. Sarojini Kadurugamuwa, Director (Legal) at Central Bank of Sri Lanka says the new laws will give more room to maneuver when conducting monetary policy.rn

rnIn some cases banks could be allowed to keep reserves in assets other than cash allowing interest to be earned.rn

rnBankers have protested that high reserves are a somewhat outdated monetary policy instrument that is partly to blame for the high interest rates in the country.rn

rnThough reserves are intended to limit the ldblquote credit creation
dblquote and perhaps improve liquidity of financial institutions it may also force banks to lend to increasingly riskier cus