When a commercial bank faces a sudden shortage of funds and cannot borrow from anywhere else, the Reserve Bank of India comes to its help with loans. In this role, the central bank is known as the:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Lender of last resort
The central bank is the lender of last resort: it lends to commercial banks when they are short of funds and no other source is available, so that a bank failing to repay its depositors does not cause a crisis. Keeping foreign exchange, banking for the government and issuing currency are its other functions.