Question

How is a central bank (RBI) banker to the banks?

Answer 1

As the bank to commercial banks, the central bank carries out several important roles:

1. It serves as the guardian of the cash reserves of commercial banks. By law, commercial banks must hold a certain portion of their deposits as reserves with the central bank.
2. It provides loans to commercial banks, typically by rediscounting their bills of exchange.
3. It functions as the “lender of last resort,” offering financial support to commercial banks in times of financial distress.