Module: | Priority Sector, Consumer Protection & Digital Lending
Q72: Consider the following:
Assertion (A): The Statutory Liquidity Ratio (SLR) acts as a solvency buffer for banks.
Reason (R): In the event of a bank run, SLR assets (like G-Secs and Gold) can be easily liquidated to repay depositors.
Reason (R): In the event of a bank run, SLR assets (like G-Secs and Gold) can be easily liquidated to repay depositors.
✅ Correct Answer: A
The correct answer is A. Both the assertion and reason are true, and the reason provides the correct explanation.
While CRR acts primarily as a liquidity buffer to manage day-to-day cash flow within the system, SLR functions strictly as a solvency buffer for the individual bank.
By forcing banks to hold a portfolio of high-quality liquid assets (HQLA) like gold and unencumbered government securities, the RBI ensures that if a bank faces a sudden, massive withdrawal demand from its depositors (a "bank run"), it possesses safe assets that can be rapidly liquidated in the secondary market.
The proceeds from this liquidation allow the bank to honor its obligations and repay depositors, thereby protecting its solvency.
While CRR acts primarily as a liquidity buffer to manage day-to-day cash flow within the system, SLR functions strictly as a solvency buffer for the individual bank.
By forcing banks to hold a portfolio of high-quality liquid assets (HQLA) like gold and unencumbered government securities, the RBI ensures that if a bank faces a sudden, massive withdrawal demand from its depositors (a "bank run"), it possesses safe assets that can be rapidly liquidated in the secondary market.
The proceeds from this liquidation allow the bank to honor its obligations and repay depositors, thereby protecting its solvency.