ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Lender of Last Resort As a Banker to Banks, the Reserve Bank 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.

Detailed explanation-2: -The central bank is called the lender of last resort because it is capable of lending–and to prevent failures of solvent banks must lend–in periods when no other lender is either capable of lending or willing to lend in sufficient volume to prevent or end a financial panic.

Detailed explanation-3: -The central bank is referred to as the lender of last resort as it saves banks from possible failure and the banking system from a possible breakdown. In case commercial banks fail to meet their financial requirements from other sources, they can approach the central bank for a loan as a last resort.

Detailed explanation-4: -A lender of last resort (LoR) is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.