Cash Reserve of Bank

Cash Reserve of Bank

Most of the liabilities of a banker are demand obligations. In order to meet the demand liabilities on deposits, he must keep with him sufficient amount of cash reserve. This is considered as first line of defense for a bank. If the bank does not keep an adequate amount of cash reserve and at any time banker is not able to meet the demand obligations then the good will of the bank will be affected and faith of customers on the bank will be shaken which may lead the bank to bank-rusty. On the other hand if more cash reserve is kept than the requirements then the profits of the bank will be affected so there is need for an adequate amount of cash reserve to keep by the commercial bank.

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A cash reserve of a bank is in following three forms:

• Cash with central bank
• Cash in hand in form of coins and currency
• Balances with other banks

Important Note

“The part of total capital of any trading bank, financial corporation or institution which is essential to deposit with central bank or to keep with it in cash form is called reserve”.

RATIO OF CASH RESERVE

Cash reserve ratio means that particular part of total deposits which is essential to keep with the central bank. Central bank is authorized to bring change in the ratio of cash reserve according to the circumstance. The ratio of cash reserve, which a commercial bank keeps or requires for meeting the demand of its customers, is the discretionary power of the bank.