UPSC Prelims 2021 Question:

In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?

1. Lending to trade and industry bodies when they fail to borrow from other sources 
2. Providing liquidity to the banks having a temporary crisis 
3. Lending to governments to finance budgetary deficits
   
   

Select the correct answer using the code given below.

Explanation:

Lender of Last Resort:

• As a Banker to Banks, the Reserve Bank of India (RBI) also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank.
  
  
• The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy. So, point 2 is correct.
  
  
• Lending to trade and industry bodies when they fail to borrow from other sources and lending to governments to finance budgetary deficits are not functions of the RBI as the 'lender of last resort'. So, points 1 and 3 are not correct.
  
  

Therefore, option (2) is the correct answer.

Subject: Economics | Money and Banking