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.

1 and 2

2 only

2 and 3

3 only

APEDIA

UPSC Prelims

2021 • 10 Oct, 2021 • Paper-1

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.

Correct Answer

2 only

Definition Context: The term 'lender of last resort' is a very specific central banking function. It is designed to prevent systemic financial collapse by offer......

💡 Analysis & Explanation

Definition Context ▼

The term 'lender of last resort' is a very specific central banking function. It is designed to prevent systemic financial collapse by offering emergency liquidity strictly to eligible financial institutions, such as commercial banks, when they face severe short-term liquidity stress.

Exclusions ▼

The central bank does not step in to provide direct bailouts or commercial loans to private trade and industry bodies facing credit failure. Thus, statement 1 is incorrect.

Government Finance ▼

While the RBI manages government debt and provides Ways and Means Advances, the phrase 'lender of last resort' does not conventionally apply to the financing of governmental budgetary deficits. Thus, statement 3 is incorrect.

Conclusion ▼

Only statement 2 accurately encapsulates the traditional definition of the lender of last resort.

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