Question

Explain the role of reserve bank of india as the lender of last resort .

Answer 1

Banks lend money to general public and business firms.

However in case of financial shortage, commercial banks cannot ask money from general public.

When no other bank or financial institution lends them money, commercial banks borrow from Reserve Bank of India at an interest rate called the Repo Rate.

Hence, RBI is called lender of the last resort.

Answer 2

The central bank also act as lender of last resort for the banks of the country. It means that if a commercial Bank fails to get financial accommodation from anywhere , it approaches the central bank as last resort. Central bank advances loan to such a bank against approved securities .