Discussion
Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non cash form such as G - secs precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as _____:
Answer: A
Correct answer: Statutory Liquidity Ratio
The statutory liquidity ratio is the proportion of net demand and time liabilities that a bank must hold in liquid assets on its own books - cash, gold and approved securities such as government paper.
It is distinct from the cash reserve ratio, which must be held as cash with the RBI and earns nothing. SLR assets remain the bank's own and earn a return, so the SLR is a lighter burden per unit, but at 38.5 per cent in 1991 it amounted to a large captive market for government borrowing - which is why the Narasimham Committee proposed cutting it to 25.
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