Question

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

• A. Cash Credit Ratio
• B. Debit Service Obligation
• C. Liquidity Adjustment Facility
• D. Statutory Liquidity Ratio

Answer 1

The Correct Option is D

The Statutory Liquidity Ratio (SLR) is a mechanism used by commercial banks to provide credit to the government. Let's delve into the details:

Definition: SLR is a requirement where banks maintain a specific percentage of their net demand and time liabilities (NDTL) in liquid assets. These liquid assets include cash, gold, or government securities.

Purpose: The primary purpose of SLR is to ensure the solvency of banks and to compel them to invest in government securities.

Mechanism: By mandating banks to hold a certain percentage of their resources in government securities, the SLR provides a ready source of capital for the government, facilitating the financing of fiscal deficits.

Conclusion: Among the given options, Statutory Liquidity Ratio (SLR) is the correct term indicating the mechanism by which commercial banks provide credit to the government.