MANAGEMENT OF

PRIMARY RESERVES

MUHAMMED RASHID
NUHMAN.M
RESHMA CHERIYAN
INTRODUCTION
Primary reserves are the minimum amount of cash required to operate
a bank. Primary reserves also include the legal reserves that are housed in a
Federal Reserve or other correspondent bank. Checks that have not been
collected are Included in this amount as well.
Total cash required to support the operations of a bank, legal or mandatory
reserve requirements, and uncollected checks. Primary reserves cannot be
loaned or invested, but may be used in a liquidity crisis caused by sudden and
heavy cash withdrawals by bank's depositors.
Primary reserves are kept in order to cover unexpected major withdrawals or
runs of withdrawals. They serve as a defense against a substantial reduction in
liquidity. These reserves must be kept more liquid than secondary reserves,
which may be invested in marketable securities such as Treasury offerings.
RESERVES
Bank reserves are funds set aside by banks for the sole purpose of being
there in case of a sudden increase in withdraws. The bank will generally
loan out the rest of their cash. There is actually a minimum of reserves
that a bank must keep on hand at all times. This is called the reserve
ratio or reserve requirement or the liquidity ratio etc.
MANAGEMENT OF RESERVES IN COMMERCIAL BANKS
The banks are expected to hold voluntarily a part of their deposits in the
form of ready cash which is known as cash reserves; and the ratio of cash
reserves to deposit is known as the(cash)reserve ratio. As banks are likely
to be tempted not to hold adequate amounts of reserves if they are left
to guide themselves on this point ,and since the temptation may have
extremely this destabilizing effect on the economy in general, the
central bank in every country is empowered to prescribe the reserve
ratio that all banks must maintain.
The management of reserves is broadly classified into

 PRIMARY RESERVES and

 SECONDARY RESERVES

MANAGEMENT OF PRIMARY RESERVES

In general primary reserve is cash required to operate a bank. Primary reserves in
an analytical term used commonly in banking circle to refer to absolutely non
earning liquid asset held by a commercial bank. Primary reserves consist of cash
on hand in the bank and deposits owned to it buy other banks. From this cash on
are able to meet customer demands for withdrawals, exchanges, and loans. Any
excess reserves may be invested in the form of the loans.
Primary reserves are

1.LEGAL RESERVES.
legal reserves are the total of vault cash and federal reserve deposits.
The legal reserves represent the portion of primary reserves which the law no
requires a bank to maintain. The law prescribes the maximum percentage of
deposits which commercial banks have to carry with the central bank.
Legal reserves assets
While banks have a number of different assets that could, in principle, be used
to as reserves to back bank deposits, two particular assets stand out:
a)Vault cash and
b)Federal reserve deposits
Vault cash
This is the paper bills and metal coins that are kept in the bank, that is, in the
vault. This cash is used, quite literally, to “cash” checks and otherwise to satisfy
currency withdrawal demands of depositors. Note that vault cash is not part of
the official money supply because it is held by banks and thus it is not in
circulation.

Federal reserve deposits

This is deposits that banks keep with the federal to clear checks and
assist in other banking activities. The federal reserve system provides
banks with a range of banking services, including loans and deposits.
Banks are not only required to keep deposits as a means of joining the
federal reserve system. These deposits are used to process checks
through the banking system.
The regulatory functions of legal reserves involves 3 steps by
the government, they are:

1. Define these particular types of assets with can be counted towards the legal
reserve requirement. In India, only two types of assets- cash in hand and
balances with the reserve bank of India are considered eligible for legal
reserve propose.
2. Regulate the rupee volume of legal reserve maintainable by bank. In India it
is the main function of the reserve bank of India
3. Require the bank to hold legal reserve equal to at least same stated fraction
of their deposit liabilities.
2.WORKING RESERVES
Reserve held by banks above the required minimum level- or cash reserve ratio –
mandated by regulations and laws. Working reserves are normally in the form of
vault currency, deposits at other banks, cash being collected and excesses
reserves held as deposits at the federal reserve bank. Banks typically hold a
buffer of working reserves to avoid their reserves falling below the minimum
required level due to large net withdrawals.
FACTORS INFLUENCING THE LEVEL OF
WORKING RESERVRS
EXTERNAL FACTORS
 Banking habit of the people
 Nature of business conditions
 Seasonal factor
 Existence of clearing house arrangement
 Cash reserve held by other banks
INTERNAL FACTORS
 Scale operation of the bank
 Structure of deposits
 Size of deposit account
 Ownership of deposit account
 Size of secondary reserves.
EXTERNAL FACTORS
1. Banking habit of the people:- Where people are bank minded and use
cheques is settling transactions, Banks would hold less in their tills than in other
where heavier reliance in places on the use of cash. Banking habit of the people it
is dependent upon the extent of economic development of country.
2. Nature of business conditions:- In times of economic prosperity when there
is general optimism banks can carry on their business with a small percentage of
cash because increased loan demand from business community could be met of
additional deposit following in the banks from different section of the community.
3. Seasonal factor:- During busy seasons when number and magnitude of
monetary transaction in a country tends to be very large banks will have to carry
large percentage of cash in vaults to satisfy increased financial needs.
4. Existence of clearing house arrangement:- This influences the size cash
holdings of banks. Where there is a clearing house banks need not hold large cash
reserves because most of the claims are cleared in cleaning house.
5. Cash reserve held by other banks:- The reserve of a bank is influenced by
the amount of cash in the same locality. If a bank in a particular place maintain a
high cash reserve. Other bank in the same place also increase their balances.
INTERNAL FACTORS
1. Scale operation of the bank:- As the size of the business of bank grows, the
bank maintains lower ratio of cash holding to deposits simply because of the fact
that it experiences lesser degree of deposit variability.
2. Structure of deposits:- A bank with larger portion of its total deposits in
fixed deposit and saving deposit accounts can carry on its business smoothly with
little cash holdings. A banker has to keep a higher percentage of reserves in
respect of current deposits which are subject to great variations.
3. Size of deposit account:- if a bank has relatively few but larger depositors,
it is apt to need a heavier cash reserves than a bank with humorous small account
because the more numerous a bank depositors the less possibility of any general
movement in deposits and greater are the chances of an approximate balancing of
incoming and outgoing.
4. Ownership of deposit account:- Generally deposits in current account are
subject to considerable variation. This tendency would be more pronounced if
current account holders are merchants and manufactures and share brokers than
those of salaried class people and farmers.
5. Size of secondary reserves:- level of working reserves is also dependent
upon the size of secondary reserves-highly liquid earning assets.
CONCLUSION
In general primary reserve is cash required to operate a bank. Primary reserves in
an analytical term used commonly in banking circle to refer to absolutely non
earning liquid asset held by a commercial bank. Primary reserves consist of cash
on hand in the bank and deposits owned to it buy other banks. From this cash on
are able to meet customer demands for withdrawals, exchanges, and loans. Any
excess reserves may be invested in the form of the loans.
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