explain the role of rbi as the lender of the last resort
Answers
Answer:
Explanation: The central bank of a country is often regarded as a lender of last resort. It provides loans to banks or qualified institutions which are passing through financial stress or are at a stage of collapse.
RBI(Reserve bank of India) is the central bank of India which is also known as Banker to Banks. The various banks of the country are under the obligation to park a certain portion of their funds with RBI as a part of their Net Demand and Time Liabilities. In order to meet the above obligation the bankers need to open accounts with RBI and even keep detail accounts with the central bank to meet inter-bank obligations.
The Reserve Bank which is known as Banker to Banks also works as the lender of the last resort. They come as a saviour for those banks which inspite of being solvent are passing through liquidity crunch. They provide the much needed liquidity to the bank at a time when no one is willing to do so. The main objective of the RBI in such a situation is to safeguard the interest of the account holders/depositors of the bank and thereby saving the bank from getting bankrupt and thus restricting the spillover affect to other banks and financial institutions. Any adverse situation can lead to financial and economical instability in the country.
Answer:
As a lender of the last resort , the central bank stands as a guarantor to the commercial banks during financial emergencies . A commercial bank may lose confidence of the depositors prompting them to withdraw their deposits in mass . Since , cash reserves of the commercial banks are only a fraction of its demand deposits, it's reserves may run out, pushing the bank into financial crises. It is the central bank during such times that stands by the commercial banks as a guarantor and saves it from insolvency.