What Are The Factors Which Determine Size Of The Cash Reserve?


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Sajid Majeed answered
The liquid asset of bank is called "Cash Reserve of Bank". It is to be kept by the bank in order to meet the demands of the customers.
It is very difficult to frame any rule for the fixation of Cash reserves by the bank. However following are the important factors which guide the banker to determine the size of Cash reserves.

Size of Deposits:
If the size of the deposits kept by the customers is large, then a large cash reserve has to be maintained. On the other hand small cash reserve will be required.
Nature of clients:
The banks will have to keep large reserves, if the clients of the banks are industrialists, brokers and businessmen, because their demand for cash will be also large.
Nature of Account:
If people keep major portion of their deposits in the current account then bank will have to keep large reserves in Cash. If major deposits are in savings or fixed account, the small reserves will be kept by the bank in cash.

Use of Credit Instruments:
If cheques and credit cards are used common by the public then banks will keep smaller amount of cash reserves as, it has been observed in advanced countries.
Clearing House facility:
If clearing house is not available then every transaction will be made in cash, so large amount of cash reserve is to be maintained. On other hand if this facility is available then small amount of cash reserve is needed.
Customers Habits:
In the under developed countries people accept only a cash in buying and selling. So a large amount of Cash reserve is needed by the banks.
Political Stability:
If there is political unrest, it will lead to economic instability and banks will keep higher cash reserves. On other hand in case of political stability, the banks will keep lesser cash reserves.

Urban and rural Area:
The bank situated in rural area will keep less cash reserve because farmer's demand for money is seasonal. On other hand the bank in city keeps higher reserves.
Nature of Loans:
If large portion of funds is used in loans and advances which can not be taken back by easily then larger cash reserve will be required by the bank.

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