UPSC Prelims 2010 · General Studies
Question 16: Economy and Social Development
Which of the following terms indicates a mechanism used by commercial banks for providing credit to the government ?
AnswerThe answer is (d).
The Statutory Liquidity Ratio is the share of their deposits (net demand and time liabilities) that banks must hold in cash, gold or approved securities, mainly government securities. Banks thus lend to the government by buying its bonds, which gives the government a steady source of borrowing. Cash Credit Ratio and Debt Service Obligation are not credit mechanisms of this kind, and the Liquidity Adjustment Facility is the RBI's tool for day-to-day liquidity. Remember: SLR = compulsory investment by banks in government securities.
Why each option is right or wrong
- (a) 'Cash Credit Ratio' is not a standard instrument for lending to the government.
- (b) Debt service obligation is the burden of repaying debt, not a bank credit mechanism.
- (c) LAF is the RBI's window for short-term liquidity to banks, not credit to the government.
- (d) Right: SLR makes banks hold government securities, which finances the government.
Explanation: written by UPSC Grade, not by UPSC.
Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.