Q. In the context of Indian economy, which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?

  1. To enable the Central Bank to control the amount of advances the banks can create
  2. To make the people’s deposits with banks safe and liquid
  3. To prevent the commercial banks from making excessive profits
  4. To force the banks to have sufficient vault-cash to meet their day-to-day requirements

Select the correct answer using the code given below.

  • 1 only
  • 1 and 2 only
  • 2 and 3 only
  • 1, 2, 3 and 4

Answer: (a) 1 only

Statutory Reserve:
  • Statutory Reserve is the amount of money, securities, or assets that need to be set aside as a legal requirement by insurance companies and financial institutions to cover claims or obligations due shortly. It is a mandatory reserve since the Government does not want to take chances if an insurance company fails to make payments for the insured peril.
  • It is a legal reserve that must be maintained by the standards set by the regulating body for the sector, which may vary from country to country. The primary aim of maintaining a statutory reserve is for the organization to meet its obligations promised to its customers even if it is running into losses.
Statutory Liquidity Ratio (SLR)
Statutory Liquidity Ratio (SLR)
  • Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank must keep in liquid cash, gold, or other securities. It’s essentially the reserve requirement that banks must meet before they may extend credit to customers.
    • Section 24 (2A) of the Banking Regulation Act of 1949 established the Statutory Liquidity Ratio (SLR).
  • This asset can be in the form of the following:
    • Cash
    • Gold valued at a price not exceeding the current price
    • Government securities and Treasury Bills
  • Objectives of Statutory Liquidity Ratio
    • To control bank credit, changing SLR would change the bank credit availability.
    • In the case of the solvency of commercial banks, it will help in repaying stakeholders.
    • Changing SLR indicates the macroeconomic conditions and what to expect from other instruments of monetary policy.
    • By making banks invest in government securities the government has enough financial resources.
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