ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’.

Detailed explanation-2: -Similar to commercial banks, central banks hold assets (government bonds, foreign exchange, gold, and other financial assets) and incur liabilities (currency outstanding). Central banks create money by issuing banknotes and loaning them to the government in exchange for interest-bearing assets such as government bonds.

Detailed explanation-3: -The interests on these loans are how the banks make money.) Central banks lend money to commercial banks in times of crisis so that they do not collapse; this is why a central bank is called a lender of last resort. And this is one of the reasons central banks matter.

Detailed explanation-4: -The central bank lends money to government when they are facing liquidity crunch or any type of insolvency. The central bank are the last resort to provide loans to the government against any type of collateral.

Detailed explanation-5: -Banks borrow and lend money in the interbank lending market in order to manage liquidity and satisfy regulations such as reserve requirements. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length.