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: Understanding the Statutory Liquidity Ratio (SLR).
The Statutory Liquidity Ratio (SLR) is the percentage of a bank's total deposits that must be maintained in the form of liquid assets, such as cash, gold, or government securities.
Step 2: Explanation of other options.
- (A) Incorrect: SLR does not ensure all deposits are converted into liquid assets, but it mandates a minimum percentage.
- (C) Incorrect: SLR does not set the interest rate; it relates to liquidity and reserves.
- (D) Incorrect: SLR does not directly restrict lending but ensures liquidity.

Step 3: Conclusion.
The correct answer is (B), as SLR requires banks to maintain a certain percentage of deposits in the form of liquid assets to ensure financial stability. Final Answer:} requires banks to maintain a percentage of deposits in the form of liquid assets.