Question

Explain Statutory Liquidity Ratio.

Answer 1

1. Commercial banks also have to keep a certain percentage of their demand and time liabilities in a liquid form, consisting of cash and government securities.
2. When the central bank wants to reduce the volume of credit, it raises the statutory liquidity ratio. As a result, commercial banks have to keep more liquid assets, and their capacity to grant credit is reduced. Similarly, the central bank can expand credit by reducing the statutory liquidity ratio.