LNP – Banks’ SRR under review for improved policy execution

• Objective once again is to further make the monetary policy implementation effective while making it beneficial for the overall financial system
• Changes will be introduced after stakeholder consultations

On the heels of the Central Bank transitioning to a single policy rate from a dual policy rate structure for implementing and communicating the monetary policy, the Central Bank said it is currently in the process of reviewing the Statutory Reserve Requirement (SRR) framework in line with the Flexible Inflation Targeting framework and the international best practices.

The objective once again is to further make the monetary policy implementation effective while making it beneficial for the overall financial system, the Central Bank said while unveiling its customary ‘Policy Agenda for 2025 and Beyond’ this week.

The changes will be introduced after stakeholder consultations with a view to optimise the SRR framework.
SRR is a minimum regulatory requirement by the Central Bank for the licensed commercial banks to maintain a certain percentage from the amount of Rupee deposits they have consisting of demand, time and savings deposits.

Currently the SRR is set at 2.0 percent, requiring the commercial banks to keep 2.0 percent of their deposit liability with the Central Bank.

A lower ratio will ensure the banking system has access to a higher level of liquidity which can then be used for lending while a higher ratio will drain such liquidity into the Central Bank, lessening the amount of money available with the banks for on-lending activity.

During the pandemic, similar to almost all Central Banks around the world which resorted to making use of almost all tools they have to support the economies beset by the pandemic induced economic downturn, the Central Bank in Sri Lanka too cut the reserve requirement in two occasions by 3.00 percent, bringing it down to 2.0 percent with the aim of further releasing liquidity into the banking system.

Further, they also cut what is called the Bank Rate by 650 basis points among other policy interventions to ease the financial conditions for the businesses and the people.

This is after cutting key policy rates by 250 basis points five times to rock bottom levels to ensure that the economy remains well funded and the people and the businesses have access to money to come out of the pandemic related business disruptions.

But experts faulted the Central Bank for such actions and later they and the public who benefitted from such actions vilified the officials at the time for causing the economic crisis in 2022.

Sri Lanka’s Central Bank didn’t do anything different to what any other Central Bank did during the pandemic.