The banks are required to maintain a certain ratio between their cash in hand and total assets. This ratio is known as:
- (a)Cash Reserve Ratio (CRR)
- (b)Statutory Liquidity Ratio (SLR)
- (c)Central Bank Reserve (CBR)
- (d)Statutory Bank Ratio (SBR)
Correct — B, Statutory Liquidity Ratio (SLR). The discriminator is the phrase 'cash in hand'. Under Section 24 of the Banking Regulation Act, 1949 a bank must itself hold a prescribed minimum proportion of its liabilities in liquid form, and the assets that qualify are cash in hand, gold and unencumbered approved securities — the bank keeps them, so they are its own assets and they show up on its own balance sheet. The Cash Reserve Ratio is different in kind: that cash does not stay in hand at all, it is parked as a balance with the Reserve Bank of India. A ratio described as running between a bank's own cash holding and its own assets can therefore only be the SLR.
- (a)Cash Reserve Ratio (CRR) — The CRR is a cash balance maintained with the Reserve Bank under Section 42 of the RBI Act, not cash retained by the bank. It also earns no interest, which is precisely why banks treat it differently from their SLR holdings.
- (c)Central Bank Reserve (CBR) — No such prescribed ratio exists in Indian banking law. The name is assembled from real words to look official.
- (d)Statutory Bank Ratio (SBR) — Also invented. It borrows 'Statutory' from SLR and 'Bank Ratio' from the Bank Rate to sound familiar.
Indian banks work under two statutory reserve requirements that look similar and are not. The Cash Reserve Ratio is a proportion of liabilities held as a cash balance with the RBI. The Statutory Liquidity Ratio is a proportion held by the bank itself in liquid assets — cash in hand, gold and approved securities, in practice mostly government securities. One is a claim on the central bank; the other stays on the bank's own books and earns a return.
The wording of this stem is loose and it is worth saying so plainly. The legal base for both ratios is net demand and time liabilities, not 'total assets', so a bank's SLR is not literally a ratio of cash in hand to total assets. What the sentence does get right, and what decides the question, is the two things it names: cash held in hand by the bank, and assets the bank owns. Both are SLR features and neither is a CRR feature. There is a second reason the answer sits with the SLR. Because SLR assets are largely government securities, the requirement doubles as a captive channel through which bank deposits finance the government — a point UPSC has itself tested. Alongside it, the two invented options are a reminder that examiners pad reserve-requirement questions with plausible acronyms; only CRR, SLR, Bank Rate, repo and reverse repo are real instruments here.
- SLR is prescribed under Section 24 of the Banking Regulation Act, 1949; CRR under Section 42 of the Reserve Bank of India Act, 1934.
- SLR-eligible assets are cash in hand, gold and unencumbered approved securities, held by the bank itself; CRR is a balance kept with the RBI.
- Both ratios are computed on net demand and time liabilities (NDTL), not on total assets.
- At the time of this August 2023 paper the SLR stood at 18% and the CRR at 4.5% of NDTL; the RBI revises both from time to time, so check the current figures before quoting them.
- Because SLR holdings are mostly government securities, the requirement acts as a standing source of credit to the government.
The stem's 'cash in hand' belongs on the SLR side of this table, which is what settles the answer.
- Reading 'cash' in a stem and reaching for CRR without checking where the cash is kept.
- Believing SLR can be met only in government securities — cash in hand and gold qualify too.
- Accepting official-sounding acronyms such as Central Bank Reserve or Statutory Bank Ratio as real instruments.
Asked as a definition item where a single phrase — here 'cash in hand' — separates the two reserve requirements.
Which of the following terms indicates a mechanism used by commercial banks for providing credit to the government ?
- (a) Cash Credit Ratio
- (b) Debt Service Obligation
- (c) Liquidity Adjustment Facility
- (d) Statutory Liquidity Ratio
Answer(d) Statutory Liquidity Ratio
The same instrument approached from its other side. Because SLR assets are mostly government securities, the requirement obliges banks to fund the government, and UPSC has tested exactly that consequence — and, as here, padded the options with an invented ratio.
When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
- (a) India’s GDP growth rate increases drastically
- (b) Foreign Institutional Investors may bring more capital into our country
- (c) Scheduled Commercial Banks may cut their lending rates
- (d) It may drastically reduce the liquidity to the banking system
Answer(c) Scheduled Commercial Banks may cut their lending rates
Once you know what the SLR locks up, this follows: cutting it frees deposits for lending, so banks have more loanable funds and lending rates tend to ease. Knowing the definition is not enough — the exam wants the direction of the effect.
- practice — not a real PYQ
Which one of the following is not an asset eligible for meeting the Statutory Liquidity Ratio?
- (a)Cash in hand
- (b)Gold
- (c)Balance kept with the Reserve Bank of India
- (d)Unencumbered approved securities
Answer(c) Balance kept with the Reserve Bank of India — that balance is how the CRR is met, not the SLR.
- practice — not a real PYQ
An increase in the Cash Reserve Ratio by the Reserve Bank of India is likely to
- (a)increase the lending capacity of commercial banks
- (b)reduce the lending capacity of commercial banks
- (c)leave bank credit unchanged
- (d)raise the money multiplier
Answer(b) reduce the lending capacity of commercial banks — a larger share of deposits is locked up with the RBI, so less is available to lend and the money multiplier falls.