Previous Year Question
Which of the following terms indicates a mechanism used by commercial banks for providing credit to the Government?
Cash Credit Ratio
Debt Service Obligation
Liquidity Adjustment Facility
Statutory Liquidity Ratio
Correct Answer: D
Detailed Solution
The Statutory Liquidity Ratio (SLR) is the prescribed proportion of a commercial bank’s Net Demand and Time Liabilities (NDTL) that must be maintained in the form of liquid assets.
These liquid assets mainly include cash, gold and unencumbered approved securities. Government securities constitute an important category of approved securities.
When a commercial bank purchases government securities, it provides funds directly to the Government’s borrowing programme. Thus, investment in government securities under the SLR framework operates as a mechanism through which the banking system provides credit to the Government.
SLR has historically served two major purposes:
Maintaining an adequate stock of safe and liquid assets with banks.
Supporting government borrowing by creating demand for government securities.
Evaluation of the other options:
Cash Credit Ratio is not a standard statutory reserve ratio. It should not be confused with the Cash Reserve Ratio (CRR), under which banks maintain a prescribed part of their NDTL as cash balances with the RBI.
Debt Service Obligation refers to the obligation to repay principal and interest; it is not a banking mechanism for providing credit to the Government.
Liquidity Adjustment Facility (LAF) is used by the RBI to manage short-term banking-system liquidity through instruments such as Repo and Reverse Repo.