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.
Answer & explanation
Answer: (b) 2 only
'Lender of last resort' describes the RBI's readiness to lend to banks at all times, so that a bank short of cash in a crisis does not collapse and trigger a run. Lending to firms is the job of commercial banks, and lending to governments is part of the RBI's separate role as banker to the government.
- ✗ 1. The RBI does not lend to trade and industry; businesses borrow from banks and markets.
- ✓ 2. When a bank faces a temporary liquidity crisis and cannot raise funds elsewhere, the RBI stands ready to lend to it; this is the lender-of-last-resort role.
- ✗ 3. Short-term advances to the Centre and States come under the RBI's function as banker to the government, not as lender of last resort.
Remember · Lender of last resort = the central bank's promise to supply liquidity to banks in distress, protecting depositors and the financial system.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “This role of RBI, that of being ready to lend to banks at all times is another important function of the central bank, and due to this central bank is said to be the lender of last resort.”
- RBI, About Us: Organisation and Functions ↗ “Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.”
Question and answer: UPSC's official GS Paper I (2021, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·