Which of the following is the mandatory requirement of setting aside in liquid assets, such as gold or Government securities, by commercial banks?
Show answer & explanation
Correct answer: B
Explanation
Answer: (B) Statutory Liquidity Ratio
Explanation:
The Statutory Liquidity Ratio (SLR) is the mandatory amount that commercial banks are required to maintain with themselves as a specific percentage of their Net Demand and Time Liabilities (NDTL). Banks may hold this amount in the form of cash, gold, or government-approved securities. Its primary objective is to ensure the liquidity of banks and to create a demand for government securities. The Reserve Bank of India (RBI) determines the SLR rate through its monetary policy. If the RBI wishes to reduce the money supply in the economy, it increases the SLR, thereby leaving banks with less funds available for lending.
Additional Points:
Cash Reserve Ratio (CRR): Under this mechanism, banks are mandatorily required to maintain a certain portion of their deposits with the RBI exclusively in the form of cash, on which they earn no interest.
Banking Regulation Act, 1949: The provision for SLR is stipulated under Section 24 of this Act.
Potential Exam Questions and Answers:
Question: What is the maximum limit for the SLR currently?
Answer: According to the Banking Regulation Act, it can be up to 40%.
Question: Can banks earn interest on the gold or securities held as part of their SLR?
Answer: Yes, banks do earn interest on these assets (particularly on government securities).