Question

Which of the following terms indicates a mechanism used by commercial banks to provide credit to the Government?

• A. Cash Reserve Ratio
• B. Debt Service Obligation
• C. Liquidity Adjustment Facility
• D. Statutory Liquidity Ratio

Hint:

SLR forces banks to hold government securities, unlike CRR which is held as cash with RBI.

Answer 1

The Correct Option is D

This question is testing the difference between the various reserve and liquidity ratios that RBI uses, and only one of them actually funnels bank money to the government.

1. Cash Reserve Ratio: Banks keep this portion of deposits with RBI as cash, which is a monetary policy tool and not a form of lending to the government.
2. Debt Service Obligation: This describes the cost of servicing existing debt, not a mechanism for extending fresh credit.
3. Liquidity Adjustment Facility: RBI uses this to inject or absorb short-term liquidity via repo and reverse repo operations, again a monetary tool rather than direct government financing.
4. Statutory Liquidity Ratio: Banks must hold a set percentage of their deposits in approved securities, which are mostly government bonds, so this directly puts bank funds into government hands.

So the correct answer is option D, Statutory Liquidity Ratio.