{"id":1689,"date":"2024-03-28T18:57:32","date_gmt":"2024-03-28T13:27:32","guid":{"rendered":"https:\/\/lotusarise.com\/qna\/?p=1689"},"modified":"2024-04-03T07:17:47","modified_gmt":"2024-04-03T01:47:47","slug":"q-in-india-the-central-banks-function-as-the-lender-of-last-resort-usually-refers-to-which-of-the-following","status":"publish","type":"post","link":"https:\/\/lotusarise.com\/qna\/upsc\/q-in-india-the-central-banks-function-as-the-lender-of-last-resort-usually-refers-to-which-of-the-following","title":{"rendered":"Q.\u00a0In India, the central bank\u2019s function as the \u201clender of last resort\u201d usually refers to which of the following?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">1. Lending to&nbsp;<strong>trade and industry bodies<\/strong>&nbsp;when they fail to borrow from other sources<br>2. Providing liquidity to the banks having a temporary crisis<br>3. Lending to&nbsp;<strong>governments&nbsp;<\/strong>to finance budgetary deficits<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Select the correct answer using the code given below<\/p>\n\n\n\n<ul class=\"mcq wp-block-list\">\n<li>1 and 2<\/li>\n\n\n\n<li>2 only<\/li>\n\n\n\n<li>2 and 3<\/li>\n\n\n\n<li>3 only<\/li>\n<\/ul>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p class=\"wp-block-paragraph\"><strong>Answer: b) 2 only<\/strong><\/p>\n<\/blockquote>\n\n\n\n<h5 class=\"wp-block-heading\" id=\"notes-hd-660526bf0fdf9\">Notes:<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A lender of last resort is an institution, usually a&nbsp;<strong>country\u2019s\u202fcentral bank<\/strong>, that&nbsp;<strong>offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.\u202f<\/strong>&nbsp;<\/li>\n\n\n\n<li>The lender of last resort functions\u00a0<strong>to&nbsp;protect individuals&nbsp;who have deposited funds and to prevent customers from withdrawing out of panic from banks with temporary limited\u202fliquidity<\/strong>. Commercial banks usually try not to borrow from the lender of last resort because such action indicates that the bank is experiencing a financial crisis.\n<ul class=\"wp-block-list\">\n<li>Some argue that having a lender of last resort encourages moral hazard: that banks can take excessive risks knowing that they will be bailed out.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>In India,\u00a0<strong>RBI is the&nbsp;lender of last resort.<\/strong>\u00a0As a<strong>&nbsp;Banker to Banks<\/strong>, the Reserve Bank also acts as the \u2018lender of the last resort\u2019.\n<ul class=\"wp-block-list\">\n<li>Lender of last resort does not lend money&nbsp;to trade and industry bodies when they fail to borrow from other sources.<\/li>\n\n\n\n<li>RBI does lend to governments to finance budget deficits but&nbsp;it&nbsp;does not come under Lender of last resort.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"bank-runs\">Bank Runs<\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A bank run is a&nbsp;<strong>situation that occurs during periods of the financial crisis when bank customers, worried about an institution\u2019s solvency, descend on the bank en masse, and withdraw funds<\/strong>. Because banks only keep a small percentage of total deposits as cash, a&nbsp;<strong>bank run can quickly drain a bank\u2019s liquidity<\/strong>&nbsp;and, in a perfect example of a self-fulfilling prophecy, cause the bank to become insolvent.<\/li>\n<\/ul>\n\n\n\n<h6 class=\"wp-block-heading\" id=\"reserve-bank-as-banker-to-banks\">Reserve Bank as Banker to Banks<\/h6>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The current accounts of individual banks are being opened in&nbsp;<strong>e-Kuber (CBS of RBI)<\/strong>&nbsp;by Banking Departments of the Regional Offices. These current accounts are also maintained for participation in&nbsp;<strong>centralized and decentralized Payment Systems<\/strong>&nbsp;and are&nbsp;<strong>used for settling inter-bank obligations<\/strong>, such as clearing transactions or clearing money market transactions between two banks, buying and selling securities and foreign currencies. Thus,&nbsp;<strong>Reserve Bank acts as a common banker, known as \u2018Banker to banks\u2019<\/strong>&nbsp;function, the operational instructions for which are issued by the concerned Central Office departments of the Reserve Bank.<\/li>\n\n\n\n<li>Among other provisions, the Reserve Bank stipulates&nbsp;<strong>minimum balances<\/strong>&nbsp;to be maintained by banks in these accounts. It is the responsibility of each bank maintaining current account with the Reserve Bank to ensure that sufficient balance is available in the account to avoid defaults in payments and settlements.<\/li>\n\n\n\n<li>As Banker to banks, the Reserve Bank provides&nbsp;<strong>short-term loans and advances<\/strong>&nbsp;to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>1. Lending to&nbsp;trade and industry bodies&nbsp;when they fail to borrow from other sources2. Providing liquidity to the banks having a temporary crisis3. Lending to&nbsp;governments&nbsp;to finance budgetary deficits Select the correct answer using the code given below Answer: b) 2 only Notes: Bank Runs Reserve Bank as Banker to Banks<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_kad_blocks_custom_css":"","_kad_blocks_head_custom_js":"","_kad_blocks_body_custom_js":"","_kad_blocks_footer_custom_js":"","_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[1,3],"tags":[38],"years":[52],"class_list":["post-1689","post","type-post","status-publish","format-standard","hentry","category-upsc","category-prelims","tag-indian-economy","years-52"],"acf":[],"taxonomy_info":{"category":[{"value":1,"label":"UPSC"},{"value":3,"label":"Prelims"}],"post_tag":[{"value":38,"label":"Indian Economy"}],"years":[{"value":52,"label":"2021"}]},"featured_image_src_large":false,"author_info":{"display_name":"LotusArise","author_link":"https:\/\/lotusarise.com\/qna\/author\/team-lotusarise"},"comment_info":0,"category_info":[{"term_id":1,"name":"UPSC","slug":"upsc","term_group":0,"term_taxonomy_id":1,"taxonomy":"category","description":"","parent":0,"count":1269,"filter":"raw","cat_ID":1,"category_count":1269,"category_description":"","cat_name":"UPSC","category_nicename":"upsc","category_parent":0},{"term_id":3,"name":"Prelims","slug":"prelims","term_group":0,"term_taxonomy_id":3,"taxonomy":"category","description":"","parent":1,"count":1251,"filter":"raw","cat_ID":3,"category_count":1251,"category_description":"","cat_name":"Prelims","category_nicename":"prelims","category_parent":1}],"tag_info":[{"term_id":38,"name":"Indian Economy","slug":"indian-economy","term_group":0,"term_taxonomy_id":38,"taxonomy":"post_tag","description":"","parent":0,"count":225,"filter":"raw"}],"_links":{"self":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1689","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/comments?post=1689"}],"version-history":[{"count":0,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/posts\/1689\/revisions"}],"wp:attachment":[{"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/media?parent=1689"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/categories?post=1689"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/tags?post=1689"},{"taxonomy":"years","embeddable":true,"href":"https:\/\/lotusarise.com\/qna\/wp-json\/wp\/v2\/years?post=1689"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}