"In the Indian Banking System, the Statutory Liquidity Ratio (SLR) plays a vital role in controlling the credit creation capacity of the Commercial Banks, as it ." (Choose the correct option to fill in the blank)
"In the Indian Banking System, the Statutory Liquidity Ratio (SLR) plays a vital role in controlling the credit creation capacity of the Commercial Banks, as it ." (Choose the correct option to fill in the blank)
Options
Official answer
Correct option: (B) — SLR requires commercial banks to maintain a certain minimum percentage of their Net Demand and Time Liabilities (NDTL) in the form of liquid assets (cash, gold, or unencumbered approved government securities) before they can extend credit.
By locking up a portion of deposits in liquid form, SLR directly reduces the loanable funds left with banks, thereby restricting their credit creation capacity.
Marking scheme
- 1.1 mark for correctly choosing option (B).
Hint
Recall the definition of SLR — a percentage of NDTL kept as liquid assets, not a rate or reserve cap.
Quick oral answer
SLR is the minimum percentage of Net Demand and Time Liabilities that a commercial bank must hold in liquid assets like cash, gold, or approved securities, which restricts how much it can lend.
Common mistakes
- 1.Confusing SLR with CRR — CRR is kept as cash reserve with the RBI, while SLR is held by the bank itself in liquid assets like cash, gold or government securities.
- 2.Assuming SLR fixes lending interest rates — this is confused with the Repo Rate/Bank Rate mechanism.
- 3.Believing SLR requires 100% of deposits to be liquid, rather than a prescribed percentage.
Analysis and explanation
SLR is a quantitative instrument of credit control used by the RBI alongside CRR, Repo Rate and Open Market Operations.
Why (B) is correct
- SLR is defined as a fixed percentage of NDTL that every bank must hold as liquid assets (cash-in-hand, gold, approved securities).
- A higher SLR leaves less money with banks to lend, reducing credit creation; a lower SLR frees up funds and expands credit.
Why the other options are wrong
- (A) is wrong because SLR does not require all deposits to be converted — only a prescribed percentage.
- (C) is wrong because fixing the maximum lending interest rate is not a function of SLR; interest rates are influenced by the Repo Rate/Bank Rate, not SLR.
- (D) is wrong because it describes a reserve-based ratio on total reserves; SLR is defined with reference to NDTL and liquid asset holding, not a cap on lending as a proportion of reserves.
Interesting facts
SLR is stipulated under Section 24 of the Banking Regulation Act, 1949, and the RBI can vary it between 0% and 40% of NDTL.
As of 2023-24, the RBI had kept SLR at 18% of NDTL, well below its historical peak of 38.5% in the early 1990s.
Unlike CRR, banks earn a return on SLR assets (e.g., interest on government securities), so raising SLR is less costly to banks than raising CRR.
Question details
Q9 of 37 questions
- Board
- CBSE
- Class
- Class 12
- Subject
- Economics
- Year
- 2026
- Section
- Section A
- Marks
- 1
- Type
- MCQ
- Chapter
- Money and Banking
- Topic
- Statutory Liquidity Ratio (SLR)
- Bloom's level
- understand
- Syllabus topic
- Unit 3: Money and Banking — Statutory Liquidity Ratio (SLR) as a Quantitative Credit Control Tool
- Author
- CBSE
- Reviewed by
- Padhantu Academic Team
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Frequently asked questions
What is the difference between SLR and CRR?
CRR is the percentage of NDTL that banks must keep as cash reserves with the RBI (earning no interest), while SLR is the percentage kept by the bank itself in liquid assets such as cash, gold, or approved government securities (which can earn interest).
How does a change in SLR affect credit creation?
An increase in SLR reduces the loanable funds available with banks, shrinking credit creation; a decrease in SLR releases more funds for lending, expanding credit creation.