Definition (1):
The amount of liquid assets that firms must hold to remain solvent and attain partial protection against a substantial investment loss is known as statutory reserves. According to the banking companies' ordinance, every bank should create a reserve fund to which transfer from net profit, (at least 20%) must-be made until it is equal to paid-up capital.
Definition (2):
A statutory reserve is the amount of liquid assets that a financial institution i.e. an insurance company or a bank must set aside for meeting unmated obligations. The liquid assets with which the reserve fund is created can be cash or something easily convertible to cash like marketable securities.
Definition (3):
A Statutory Reserve is the amount of assets, securities, or money that must be set aside as a legal requirement by financial institutions and insurance companies for covering its future obligations or claims. The fund created with statutory reserve is called statutory reserve fund.
The statutory reserve amount can be calculated in two ways:
- Rule-based approach, and
- Principle-based approach.
Use of the Term in Sentences:
- A statutory reserve fund created following the principle-based approach gives insurers greater flexibility.
- A firm’s statutory reserve fund gives confidence to the investors.