Economics • Banking & FinanceEasy
What is the primary function of the statutory liquidity ratio maintained by commercial banks in India?
A. To ensure banks maintain a specific percentage of their net demand and time liabilities in liquid assets like cash, gold, or approved securities✓ Correct Answer
B. To provide direct emergency loans exclusively to agricultural cooperatives during monsoon failures
C. To regulate foreign exchange reserves held by private commercial entities operating overseas
D. To finance long-term infrastructure projects managed directly by the central government
💡 Solution & Explanation
The statutory liquidity ratio requires commercial banks to hold a specified fraction of their demand and time liabilities in liquid assets such as government securities, gold, or cash to safeguard solvency. Alternative functions relate to specialized development funding or foreign exchange management handled through different mechanisms. This tool gives the central bank control over credit creation capacity.
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