Economics • Banking & FinanceMedium
What is the primary purpose of the Statutory Liquidity Ratio that scheduled commercial banks are mandated to maintain in India?
A. To ensure that commercial banks invest a specified minimum percentage of their net demand and time liabilities in liquid assets like government securities to safeguard depositor interests.✓ Correct Answer
B. To provide an interest-free reserve deposit directly with the Reserve Bank of India to control inflationary liquidity expansions.
C. To fund long-term infrastructure projects undertaken exclusively by state governments.
D. To subsidize agricultural credit lending rates for cooperative rural banks.
💡 Solution & Explanation
Statutory Liquidity Ratio requires commercial banks to maintain a prescribed percentage of their net demand and time liabilities in liquid assets such as cash, gold, or approved government securities before lending to customers. This requirement guarantees solvency and liquidity, protecting depositors against sudden bank runs. Unlike the cash reserve ratio which must be kept with the central bank, statutory liquidity ratio assets are held within the bank's own custody or designated vaults. The Reserve Bank of India is empowered under the Banking Regulation Act, 1949, to adjust this ratio within statutory limits.
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