Under Statutory liquidity ratio, commercial banks are required to keep a fraction of __________ in form of liquid assets.

The correct answer is total demand and term deposits.

Key Points

 Statutory liquidity ratio(SLR) is a government term where commercial banks are mandated to keep a specific proportion of total demand and term deposits in the form of liquid assets.

• It is determined by the RBI.
• It is used to control inflation and fuel growth, by decreasing or increasing the money supply.
• Liquid Assets,  Net Demand and Time Liabilities (NDTL) and SLR Limit are the three components of SLR under Section 24 and Section 56 of the Banking Regulation Act 1949.
• Liquid Assets: Here assets like gold, security bonds can be easily converted to cash.
• Net Demand and Time Liabilities (NDTL): It refers to the total demand and time liabilities (deposits) of the public that are held by the banks with other banks.
• Demand deposits consist of all liabilities, which the bank needs to pay on demand. They include current deposits, demand drafts etc.
• Time deposits consist of deposits that will be repaid on maturity.
• SLR Limit in India was a maximum of 40% and minimum of 20.75%. However, the Reserve Bank of India (RBI) amended the Banking Regulation Act in January 2017 to remove the floor rate of 20.75% for SLR. This means that the RBI can now set the SLR at any level between 0% and 40%.
• The RBI will incur a penalty on a bank if it does not keep the required SLR ratio.
• SLR is calculated using the given formula: SLR rate = (liquid assets / (demand + time liabilities)) × 100%​

Additional Information Cash reserve ratio

• The Cash Reserve Ratio (CRR) is a monetary policy tool used by central banks, including the Reserve Bank of India (RBI), to regulate and control the money supply in the economy.
• CRR is the percentage of total deposits that commercial banks are required to keep as reserves with the central bank.
• It is a portion of the bank's demand and time liabilities.
• The primary objective of implementing CRR is to ensure the liquidity and stability of the banking system while controlling inflation and managing credit growth.
• When the central bank increases the CRR, it reduces the amount of money available for lending by commercial banks.
• This helps reduce excess liquidity in the economy, controlling inflationary pressures, and curbing excessive credit expansion.
• On the other hand, when the central bank decreases the CRR, it increases the amount of money available for lending by commercial banks.
• This can stimulate credit growth, promote economic activity, and ease liquidity conditions in the economy.