India, the central bank’s function as the ‘lender of last resort usually refers to which of the following?
- Lending to trade and industry bodies when they fail to borrow from other sources
- Providing liquidity to the banks having a temporary crisis
- 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
Explanation
Only statement 2 is correct
- RBI functions as a banker to other Banks:
- The Central Bank acts as a custodian of the cash reserves of commercial banks. Banks of the country are required to keep a certain percentage of their deposits with the Central Bank (known as Cash Reserve Ratio).
- As a lender of last resort, the Central Bank extends loans to commercial banks when all other sources of raising funds are practically closed. So, providing liquidity to the banks having a temporary crisis
- It acts as a bank for central clearance, settlements, and transfers. As all commercial banks have accounts with the Central Bank, they can easily settle claims of various commercial banks against each other by making debit and credit entries in their accounts.
