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

Step 1: Understanding the Concept.
Statutory Liquidity Ratio (SLR) requires commercial banks to keep a fixed percentage of their deposits in the form of approved securities, and most of these are government securities. This effectively channels bank funds into lending to the government.

Step 2: Check option A.
Cash Reserve Ratio requires banks to park a percentage of deposits with the RBI in cash, not in government securities, so it is a monetary-control tool rather than a way of lending to the government.

Step 3: Check option B.
Debt Service Obligation refers to the repayment burden of existing debt and is not a credit mechanism itself, so it is wrong.

Step 4: Check option C.
Liquidity Adjustment Facility is a short-term tool RBI uses to manage liquidity in the banking system through repos and reverse repos, not a direct channel of bank credit to the government.

Step 5: Final Answer.
SLR is the mechanism that channels bank funds into government securities, so option D is correct.