Rational Behind Changing CRR/SLR REquirement by SBP and its Impact on Economy with a Special Reference to Banks

Abstract

This Research Report is intending to identify rationale of SBP behind changing SLR/CRR Requirements and its impact on general economy and financial intermediaries with a special references to banks. CRR (Cash reserve requirements) and SLR (statutory liquidity requirement) are monetary tools at the disposal of SBP through which SBP intends to achieve its macro economic targets. CRR and SLR are the two parts of the reserve requirements, which is an instrument at the disposal of State Bank of Pakistan to control inflation, interest rates and money supply in the economy. Reserve requirement is one of the three tools to implement monetary policy. These requirements are rarely changed because other instruments are more effective then this instrument. But when State Bank changes these requirements they affect different segments of economy such as stock market, banks, money supply interest rates etc. Focus of the report is to identify the effect of changes in CRR and SLR on general economy and also the profits of banks. A questionnaire has been developed to get the consent of professionals from financial institutions about recent changes made by SBP last year has impacted our ii economy and financial institutions. To study how theses changes impact the profitability of banks a hypothesis has been developed and to prove this hypothesis two banks Askari Commercial Bank Limited and Bank Alfalah Limited are taken as sample, and by using there financial figures hypothesis is proved. Statistical tool used is correlation, which checks out the relation between two variables. Relation between Changes in CRR and SLR and profits of bank is identified by calculating opportunity cost of CRR and SLR and then finding out relation of opportunity cost with changes. And it is proved that change in CRR and SLR changes has negative relation with profits of banks. As these ratios will increase the profit will decrease and vise-versa