Question

What role of RBI is known as ‘lender of last resort?

Answer 1

Role of RBI as the ‘Lender of Last Resort’:

• Guarantor of Liquidity: The RBI acts as the ultimate source of cash for commercial banks when they face temporary liquidity shortages and fail to raise funds from the open market.
• Provider of Emergency Credit: The RBI directly intervenes by granting immediate short-term loans, advances, and discounting facilities to distressed banks to fulfil their urgent cash demands.
• Secured Financial Accommodation: The RBI extends these financial lifelines strictly against eligible, high-quality collaterals, approved government securities, or trade bills of exchange.
• Systemic Risk Mitigator: The RBI monitors the banking sector to prevent a localised liquidity crunch in one bank from spreading into a widespread panic (bank runs) across the entire financial system.
• Supervisory Restructuring: While providing emergency funds, the RBI assumes strict oversight to audit, correct, and restructure the bank’s internal financial operations to ensure future stability.