Question

Explain the role of the Reserve Bank of India as the “lender of last resort”.

Answer 1

Central Bank is the apex bank which controls the entire banking system of a country. It has the sole authority to issue notes in that country. It also acts as a banker to the government and controls the supply of money in the country. The Central bank provides financial assistance to commercial banks by rediscounting eligible bills of exchange. When commercial banks do not get loan facilities from any other sources, they approach the Central Bank as a last resort. The Central Bank advances loans to such banks against approved securities. Thus, the Central Bank acts as a ‘lender of the last resort’.