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SSC Economics Sample Paper NCERT Sample Paper-6

  • question_answer
    Consider the following statements with regard to Statutory Liquidity Ratio [SLR]:
    1. To meet SLR, commercial banks can use cash only.
    2. SLR is maintained by the banks with themselves.
    3. SLR restricts the banks' leverage in pumping more money into the economy.
    Which one of these statements is/are correct?

    A)  1, 2 and 3        

    B)  1 and 3

    C)  2 and 3

    D)  2 only

    Correct Answer: C

    Solution :

    [c] Every bank in India has to maintain at the close of business every day, a minimum proportion of their net demand and time liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). In simple words, it is the percentage of total deposits banks have to invest in government bonds and other approved securities. A SLR bond also qualifies for the portfolio maintained by banks to meet the liquidity requirement. RBI in November cut the SLR for banks by one percentage point and it now stands at 24%. What SLR does is it restricts the bank's leverage in pumping more money into the economy. On the other hand, CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the RBI. Higher the ratio, the lower is the amount that banks will be able to use for lending and investment. The other difference is that to meet SLR, banks can use cash, gold or approved securities whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas SLR is maintained in liquid form with banks themselves. A cut in SLR means that the home, car and commercial loan rates will go down. It also means that banks will now have the option of selling Rs.40, 000 crore of government securities that until now formed part of their statutory investments. The RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrict the bank's leverage position to pump more money into the economy.


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