In India, the central bank's function as the 'lender of last resort' u

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.

[amp_mcq option1=”1 and 2″ option2=”2 only” option3=”2 and 3″ option4=”3 only” correct=”option2″]

This question was previously asked in

UPSC IAS – 2021

The central bank’s function as the ‘lender of last resort’ usually refers to providing liquidity to the banks having a temporary crisis.

The ‘lender of last resort’ is a function of the central bank where it provides emergency liquidity to financial institutions (primarily commercial banks) that are experiencing severe financial difficulties but are considered solvent. The purpose is to prevent bank runs and the collapse of the banking system, thereby maintaining financial stability.

Statement 1 is incorrect: The lender of last resort facility is primarily for banks and sometimes other critical financial institutions, not individual trade or industry bodies. Statement 3 is incorrect: Lending to the government to finance deficits is a fiscal operation or part of monetary policy implementation (e.g., buying government bonds), distinct from the emergency liquidity provision to illiquid banks in times of crisis.

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