The central bank stands as a guarantor to the commercial banks during financial emergencies. A commercial bank may lose confidence of the depositors prompting them to withdraw their deposits enmass. Since cash reserve of the commercial bank are only a fraction of its demand deposits, its reserves may run out, pushing the bank into financial crises. It is the central bank as a guarantor and saves it from insolvency.

On the basis of above text, what is the function of central bank?

clearing house function controller of credit banker to the Government lender of last resort

lender of last resort

Reserve Bank is the only institution which can issue currency. When commercial banks need more funds in order to be able to create more credit, they may go to market for such funds or go to the Central Bank. Central bank provides them funds through various instruments. 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.