Factors Determining Cash Reserves

Cash reserves refer to cash in hand with bank. It is also known as till cash. The bank must maintain cash reserves to meet its checking obligations.  There are some factors that bank should consider that how much cash reserves should be maintained. The factors that determine cash reserves are discussed below.

1. Nature of Accounts

Bank offers three kinds of accounts as current, saving and fixed deposit accounts. If the bank has large number of current depositors, it will have to maintain high level of cash reserves because current depositors carry out a large turnover of cash transactions with the bank. Conversely, if major deposits are in saving and fixed deposit accounts, the bank will not required to maintain a high level of cash reserves because such depositors do not take out much money from their accounts.

2. Nature of Business

The bank must assess the nature of business of its accountholders. If most of the accountholders are businessmen, brokers, and industrialists, the bank will have to maintain upper level of cash reserves because their demand for cash is high.

3. Size of Deposits

The bank should keep large amount of cash reserve, if the accountholders deposit large sum of money. On the other hand, the bank should maintain small amount of cash reserve, if the accountholders deposit small sum of money.

4. Use of Credit Instruments

The bank should keep high level of cash reserve where people use cheques and credit cards. Using of credit instruments is the habit of developed countries like USA. In such countries the bank may keep low level of cash reserve. Conversely, the bank should maintain high level of cash reserve where people prefer using cash in shopping and business dealings.

5. Clearing House Facility

If clearing house facility is available, then a smaller amount of till cash will be required because the banks will have to pay the difference of the cheques drawn upon them. In the absence of clearing house facility then transactions will be made in cash. So large amount of cash reserve will be needed.  

6. Area of Operation

The area of operation also affects the cash reserve. If a bank is located in a city more cash reserve will be required than a bank located in a rural area.

7. Saving Habits

The bank will have to keep high level of cash reserve where people use money unnecessarily and where extravagance is common.   On the other hand, where people have developed saving habits, in such a situation the bank will need small amount of cash reserve.

8. Government Requirements

In most of the countries where central bank sets the minimum amount of cash reserves that must be maintain by commercial banks. This compulsory requirement also affects cash level at the bank.