UPSC Prelims 2021 · Question 15 of 97
UPSC Prelims 2021 question on Lender of Last Resort
- ExamUPSC CSE
- Year2021
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicBanking
- DifficultyEasy
- TypeStatement
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.
Show answer
Answer: B. 2 only
Verdict
Correct statement: 2 only → Option (b).
Analysis
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. As a Banker to Banks, the Reserve Bank also acts as the 'lender of the last resort'.
It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and have an adverse impact on financial stability and thus on the economy.
Statement by statement
Statement 1 — INCORRECT: Lender of last resort refers to lending to banks, not directly to trade and industry bodies.
Statement 2 — CORRECT: It refers to providing liquidity to banks having a temporary crisis.
Statement 3 — INCORRECT: Financing budgetary deficits is not part of the 'lender of last resort' function.