Previous Year Question
In the context of the Indian economy, which of the following is/are the purpose(s) of ‘Statutory Reserve Requirements’?
To enable the Central Bank to control the amount of advances the banks can create.
To make the people’s deposits with banks safe and liquid.
To prevent the Commercial Banks from making excessive profits.
To force the banks to have sufficient vault cash to meet their day-to-day requirements.
Select the correct answer using the codes given below:
Only 1
1 and 2
2 and 3
All of these
Correct Answer: B
Detailed Solution
Statutory Reserve Requirements primarily include the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). They enable RBI to influence the lending capacity and liquidity position of banks.
Statement 1 is correct. When banks are required to keep a specified proportion of their deposits as reserves, the entire amount of deposits cannot be used for loans and advances.
An increase in CRR or SLR reduces the resources available for lending.
A reduction in these ratios may increase the capacity of banks to extend credit.
The central bank can, therefore, influence credit creation and the volume of advances in the banking system.
Statement 2 is correct. Reserve requirements compel banks to maintain a portion of their liabilities in cash or other safe and liquid assets. This strengthens their ability to meet depositors’ claims and supports banking liquidity and solvency.
Statement 3 is incorrect. The direct purpose of reserve requirements is not to prevent commercial banks from earning excessive profits. Their principal objectives concern monetary control, credit regulation, liquidity and banking-system stability.
Statement 4 is incorrect. Statutory reserves do not merely require banks to hold physical cash in their vaults for day-to-day transactions.
CRR is maintained as a prescribed balance with RBI, whereas SLR may be maintained in specified liquid assets such as cash, gold and unencumbered approved securities. Therefore, maintaining sufficient vault cash is not an accurate statement of their purpose.