BNM Monetary InstrumentsSRRMinimum liquidity requirementOpen market operationInterestLending policyMoral suasionDiscount house

SRR

Variation or adjustment will immediately affect the deposits and loans level

If increases SRR – restrictive, would reduce deposits and loans level

If decreases SRR – expansionary, would increase deposits and loans level

First introduced in Jan. 1959 and since then the ratio has ranged from 2% to 14%.

Minimum liquidity requirement

Effective from Feb. 1987, commercial banks are required to keep 17% of its eligible liabilities in liquid assets and 8% in primary liquid assets

Primary liquid assets includes RM notes, coins, balances with BNM, overnight money, money at call with discount houses, Malaysian Govt securities and Cagamas bonds (< 1 year maturity)

Liquidity ratios work in the same way as the SRR. The only difference is , unlike required bank reserves which are immobilised in BNM , statutory liquid assets do yield a return

Open market operation

Involves buying and selling of Govt sec by BNM in open organised markets to control the flow of bank credit and banks reserves

If BNM buys Govt sec – expansionary policy – pumping money into the banking system and vise versa

Interest rate regulation

BNM can influence the availability and cost of bank credits as well as the interest charged for bank deposits

Variations in bank interest rate will induce or discourage suppliers of fund (depositors) and the seekers of these funds (borrowers)

Prior 1978 use ‘administered’ interest rate regime to:

i. Influence level of savings Ii. Influence maturity structure of savings Iii.promote growth of local banks by limiting rate

competition with foreign banks Iv. Protect balance of payments – capital inflows

and outflows depends on return on capital invested

Interest rate regulation In Oct 1978, BNM introduced a new interest rate

regime to foster greater competitionCommercial banks were allowed to determine

their own interest rates for deposits as well as prime lending rate

Recent years, use Base lending rate (BLR):BLR is the lending rate applicable to the bank

best customers –excellent credit standing. Other customers will have to borrow at a margin above BLR

BLR introduced on Nov 1983 is based on:a bank’s cost of funds ( after provisions for the

cost of holding cash, SRR and liquid asset requirements),

Overhead costs, plus profit margin

Interest rate regulationBLR= Bank’s cost of fund +overheads +

Profit MarginProfit margin is based on:Customer’s credit standingNature of projectRepayment schedulecollateral

Moral suasion

Refers to a traditional BNM technique of informally inducing a positive voluntary response from the financial system to its policy initiatives

Particularly to change attitudes and approaches in banking techniques

Discount house