Question

“In the Indian Banking System, the Statutory Liquidity Ratio (SLR) plays a vital role in controlling the credit creation capacity of the Commercial Banks, as it _______”

• A. ensures that all the deposits are converted into liquid assets.
• B. requires banks to maintain a percentage of deposits in the form of liquid assets.
• C. sets the maximum interest rate which the banks can charge on loans.
• D. promotes banks from lending beyond a specific proportion of their total reserves.

Hint:

SLR ensures banks maintain enough liquidity to meet withdrawal demands and maintain financial stability.

Answer 1

The Correct Option is B

Step 1: Defining the Statutory Liquidity Ratio (SLR).
The SLR is a monetary policy tool used by the central bank that mandates commercial banks to keep a specific portion of their Net Demand and Time Liabilities (NDTL) in safe and liquid assets like gold, cash, or government-approved securities.
Step 2: Analyzing the alternatives.
- (A) is incorrect because banks are only required to keep a fraction, not the entirety, of their deposits in liquid form.
- (C) is incorrect because interest rate ceilings are separate regulatory mechanisms and not the primary function of SLR.
- (D) is incorrect because while SLR affects lending capacity, its primary definition is the requirement to hold specific liquid reserves.

Step 3: Final Result.
Option (B) accurately describes the mandate where banks must hold a designated ratio of their deposits in liquid assets before they can offer credit to customers.
Final Answer: requires banks to maintain a percentage of deposits in the form of liquid assets.