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Question
What is the effect of a rise in the rate of SLR on the creation of credit?
Options
An increase in SLR reduces the ability of banks to give .
a increase in SLR increases the ability of banks to give credit
a decrease in SLR increases the ability of banks to give credit.
Both An increase in SLR reduces the ability of banks to give credit and a decrease in SLR increases the ability of banks to give credit.
Solution
Both An increase in SLR reduces the ability of banks to give credit and a decrease in SLR increases the ability of banks to give credit.
Explanation:
Commercial banks are required to maintain a minimum proportion of net demand and time liabilities with themselves, known as the SLR. SLR is kept in the form of designated liquid assets such as excess reserves, government, and other recognised securities, or bank current account balances. By changing the SLR, the reserve bank can influence the banks' ability to create credit. The ability of banks to sell government assets or borrow against them from the central bank is affected by changes in the SLR. An increase in SLR diminishes banks' ability to extend credit, while a drop in SLR increases banks' ability to extend credit.