question_answer

Explain the 'lender of last resort' function of the central bank.

Or

Explain 'government's banker? function of the central bank.

 

Answer:

When commercial banks exhaust all resources to supplement their funds at the time of liquidity crisis, the Central bank acts as the lender of the last resort for them.

When Commercial banks cannot meet obligations of their depositors, the Central bank comes to their help. The Central Bank advances credit against eligible securities subject to certain terms and conditions. This saves the Commercial banks from a possible breakdown. This is an important function of the Central banks in the banking system of a country

Or

The Central bank works as a Commercial bank for the government. Central bank provides all services and facilities to the government like ordinary banks provides services to public. Central Bank manages funds of all government departmental undertakings and the funds of government. It also provides loans when government needs. It manages Public debt also. It also accepts the payment of taxes from the public on the behalf of the government and makes payment for the cheques issued by government. Deficit financing through borrowing from RBI.