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Liquidity principle of a bank

Liquidity means the capacity to produce cash on demand. Commercial banks keep sufficient cash in their own vaults as well as with the central bank of the country from where they can draw if necessity arises.
Deposits are the life blood of the commercial banks. These are the borrowings by the banks from the depositors. Depositors are repayable on demand or after expiry of a certain period. Everyday depositors either deposit or withdraw cash. To meet the demand for cash of the depositors, all commercial banks have to keep a certain amount of cash in their tills. This is called liquidity principle of bank.
Because in the absence of this, banks may fail to meet customer’s daily requirements of cash. If it happens, banks suffer credibility and may face a ‘run’ that is failure to meet cash demand of depositors. That is why; banks are to keep adequate funds that are liquidity to meet customers’ need.
This is also a legal requirement. All commercial banks in Bangladesh are required by Bangladesh bank to maintain a certain percentage of their deposits as their liquidity which is called ‘statutory liquidity ratio’ (SLR). Currently this requirement is 18% of total deposit liabilities. Out of this 18%, 5.5% is to be kept with Bangladesh bank as cash which is called cash reserve ratio (CRR). This may be higher or lower depending on central bank’s instructions.