Explain the role of the Central Bank as the ‘lender of last resort’.

The Central Bank is the apex monetary authority of the country. It is responsible for the organisation, running, supervision, regulation and development of the country’s monetary and financial system. In Indi, the Reserve Bank of India was established on 1 April 1935 under the RBI Act 1934. It was a private entity until it was nationalised on 1 January 1949.

One of the major function of any Central Bank is to act as the lender of the last resort. The Central Bank offers loans and other financial assistance to any financial institution that offers financial assistance to banks and other financial institutions who are in dire need of funds and are not able to procure the required funds from elsewhere. Thus the Central Bank acts as the lender of the last resort by offering the adequate funds to rectify the crisis faced by the banks.

The important implication of his function of the Central Bank is the protection of the interests of the depositors and the customers of the banks and ensure the stability of the banking system. It can be carried out through granting loans, performing open market operations or through direct support. But the financial institutions focus to use this privilege from the Central Bank only during utmost emergencies as this can indicate their financial instability.