Module: | Priority Sector, Consumer Protection & Digital Lending
Q85: Consider the impact of a high Statutory Liquidity Ratio (SLR) on the economy:
1. It ensures a captive market for Government Securities.
2. It can lead to the "crowding out" of private sector credit.
3. It generally increases the cost of borrowing for the Government.
2. It can lead to the "crowding out" of private sector credit.
3. It generally increases the cost of borrowing for the Government.
✅ Correct Answer: A
The correct answer is A. Statement 1 is Correct: A high SLR mandates banks to invest heavily in approved securities, primarily G-Secs, thereby guaranteeing the government a stable, "captive" market for its debt.
Statement 2 is Correct: Because a massive portion of bank deposits is forcibly channeled into government debt, significantly less capital remains available to lend to private businesses and consumers.
This phenomenon is known as the "crowding out" of private sector credit.
Statement 3 is Incorrect: By artificially creating a massive, mandated demand for its bonds via high SLR, the government can actually borrow money at lower interest rates.
Therefore, high SLR generally decreases, rather than increases, the government's cost of borrowing.
Statement 2 is Correct: Because a massive portion of bank deposits is forcibly channeled into government debt, significantly less capital remains available to lend to private businesses and consumers.
This phenomenon is known as the "crowding out" of private sector credit.
Statement 3 is Incorrect: By artificially creating a massive, mandated demand for its bonds via high SLR, the government can actually borrow money at lower interest rates.
Therefore, high SLR generally decreases, rather than increases, the government's cost of borrowing.