Lender of last resort

Banks lend to everyone else, but who lends to a bank when it needs money urgently? In India, the workbook's answer is the Reserve Bank of India.

The workbook states this in one line, inside its description of RBI: RBI is also the lender of last resort for all commercial banks. The idea behind that phrase is that when a bank faces a sudden cash shortage and no other bank or lender is willing to step in, the central bank stands ready to lend, so that one bank's temporary shortage does not turn into a wider loss of trust in the banking system.

This sits alongside RBI's other roles the workbook names: regulating and supervising commercial banks, financial institutions and non-banking finance companies, and formulating and implementing the country's monetary policy.

The workbook gives this role in a single sentence and does not go on to describe the mechanics — it does not name a specific lending facility, an interest rate, or a rupee limit for RBI acting as lender of last resort in this booklet. What it does state, in the same passage, is RBI's broader mandate: to maintain price stability, ensure credit flows to productive economic sectors, act as regulator and supervisor of the banking system, and serve as banker to the Government of India.

Because commercial banks are described as regulated financial institutions dealing with public money and trust, and subject to mandatory inspection and audit by RBI every year, the lender-of-last-resort role sits on top of that everyday supervision — RBI already knows the health of the banks it may need to support.

Suppose a mid-sized commercial bank faces a sudden, unexpected rush of withdrawals — say, Rs 500 crore in a single week — and other banks are unwilling to lend it short-term funds to meet the demand.

Because the workbook names RBI as the lender of last resort for all commercial banks, that bank's route in such a situation is to RBI, not to the open market, where no one else may be willing to lend on short notice.

This illustration is built only on the one line the workbook gives. It does not state the specific facility, the rate, or the conditions RBI would apply in a real case. No rupee figure beyond this illustrative Rs 500 crore should be assumed from this booklet.

Chapter 4 (Savings Related Products), in its section on Reserve Bank of India, names RBI as the lender of last resort for all commercial banks, alongside RBI's founding date and its monetary-policy role. Expect a one-line recall question naming which institution plays this role for Indian commercial banks.

• RBI is the lender of last resort for commercial banks — not SEBI, and not the Government of India directly.
• The workbook gives no figure — no rate, no limit, no named facility — for this role. Do not assume one that is not stated here.
• Do not confuse this with the Central Government deposit insurance scheme, which protects a depositor's own money up to Rs 5 lakh per bank; the lender-of-last-resort role is about lending to the bank itself, not insuring individual depositors.