Explain the “lender of last resort” function of central bank.

1.	Explain the “lender of last resort” function of central bank.
Answer» The central bank is under the obligation to provide funds to commercial banks as and when they require financial help. The aim is that no sound and genuine business transaction should be restricted or abandoned due to shortage of funds. Commercial banks approach central bank as a last resort in distress. The central bank advances necessary credit against eligible securities, subject to certain terms and conditions. Central bank keeps the reserves of commercial banks so gives guarantee of solvency & never refuses to accommodate any eligible bank and help them to meet emergencies.

Answer»

The central bank is under the obligation to provide funds to commercial banks as and when they require financial help.

The aim is that no sound and genuine business transaction should be restricted or abandoned due to shortage of funds. Commercial banks approach central bank as a last resort in distress. The central bank advances necessary credit against eligible securities, subject to certain terms and conditions. Central bank keeps the reserves of commercial banks so gives guarantee of solvency & never refuses to accommodate any eligible bank and help them to meet emergencies.

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