Economics • Banking & FinanceMedium
How does an increase in the Statutory Liquidity Ratio (SLR) impact the lending capacity of commercial banks?
A. It expands lending capacity by increasing cash reserves
B. It restricts lending capacity by forcing banks to invest a higher proportion of deposits in specified approved securities✓ Correct Answer
C. It leaves lending capacity completely unchanged because SLR applies only to foreign assets
D. It eliminates commercial bank credit creation entirely
💡 Solution & Explanation
A higher Statutory Liquidity Ratio compels commercial banks to maintain a larger share of their net demand and time liabilities in safe liquid assets like government securities, leaving fewer funds available for commercial lending. This quantitative tool restricts credit expansion during inflationary periods. Vault cash and gold also count towards fulfilling this statutory requirement.
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