Malaysian bank raises SRR beginning Feb. 1

Malaysian bank raises SRR beginning Feb. 1

KUALA LUMPUR (AFP): Malaysia's central Bank Negara Saturday
announced an increase in the statutory reserve requirement (SRR)
of banking institutions with effect from Feb. 1.

Bank Negara said the SRR of commercial banks, finance firms
and merchant banks would be raised by one percentage point from
11.5 percent to 12.5 percent of their eligible liabilities.

"The increase reflects the continuing commitment of Bank
Negara in containing the rate of credit and monetary expansion
and to contain inflationary pressures that may arise from excess
liquidity in the system," it said in a statement.

Bank Negara said during the final quarter of 1995, there was a
strong increase in credit expansion by the banking institutions
generating an acceleration in monetary growth.

"At the end of December, monetary growth (M3) accelerated to
an annual rate of 22.2 percent (13.1 percent in 1994)," it said,
adding the increase was mainly due to the rapid rate of credit
expansion by 28.1 percent compared to 14.7 percent in 1994.

However, the central bank said the adjustment in the SRR would
have a marginal effect on the cost of funds.

Since 1989, the SRR has been raised eight times to check
inflationary pressures, banking analysts told AFP.

The central bank raised the SRR three times in 1994 alone to
check destabilizing foreign capital inflows when Malaysian inter-
bank rates were much higher than the world rates.

Hike

The SRR was hiked from 8.5 percent to 9.5 percent on January
3, 1994 and it was again raised by a percentage point to 10.5
percent on May 16, and up to 11.5 percent on July 1.

The three increases absorbed an estimated 4.8 billion ringgit
(US$1.92 billion) of excess liquidity from the banking system,
analysts said.

"We expect the new increase will absorb between one billion
ringgit and two billion ringgit," an analyst with a bank-linked
securities company said.

He also said the increase in the SRR was long time coming
after Bank Negara had intervened in the money market over the
past few months.

The central bank mopped up short-term funds and pushed up
domestic rates last week in an aggressive bid to defend the
ringgit after the local currency came under heavy selling
pressure.

"Now, the increase in the SRR is becoming more permanent
rather than borrowing from the inter-bank market which the
(central) bank has done in the past," he said.

The analyst said when Bank Negara borrowed short-term funds to
mop up excess liquidity, it would still have to make payments at
the expiry of the term and the funds would be injected back into
the market.

The raising of the SRR was more logical as it "saves Bank
Negara money", he said.

He expected the inter-bank rates to go up as funds would
become more expensive and in turn, push up the base lending
rates.