Suppose the initial deposits are Rs.1000 cr and the Statutory Liquidi…

Suppose the initial deposits are Rs.1000 cr and the Statutory Liquidity Ratio is 20%. How much loan the bank can give from the given initial deposits?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Rs. 800

A bank cannot lend out all its deposits. The RBI requires it to keep a fraction of its demand and time deposits in specified liquid assets; this fraction is the Statutory Liquidity Ratio (SLR). Only the remaining deposits can be given as loans; with only the SLR given, that is the reserve to be kept.

Given:

Initial deposits = Rs. 1000 cr
Statutory Liquidity Ratio (SLR) = 20%

Working it out:

Reserves to be kept = 20% of 1000 = Rs. 200 cr
Loans that can be given = 1000 − 200 = Rs. 800 cr
Rs. 200 cr is the part held back as reserves, not the part lent; the bank can give loans of Rs. 800 cr, which is Option (1).

Note: It seems that there is a mistake in the original NTA paper, which prints the options as “Rs. 800”, “Rs. 500”, “Rs. 200” and “Rs. 400” without the unit, when they should read “Rs. 800 cr”, “Rs. 500 cr” and so on, since the initial deposits are given as Rs.1000 cr. The meaning is clear, and the answer is unaffected.

NCERT (2025-26): “3.3.2 Limits to Credit Creation and Money Multiplier … The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending’. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ (CRR). Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.…”