The role of the central bank in providing emergency funds to a solvent but illiquid bank or to the banking system when no other lender will, so as to prevent a panic from spreading.
- It is one of the classic functions of the Reserve Bank of India as the central bank, alongside being the issuer of currency, banker to the government, and banker and supervisor to other banks.
- The aim is to stop a temporary cash shortage at one bank from triggering contagion and a wider run on the banking system.
- The support is meant for institutions that are illiquid but fundamentally solvent; it is provided against collateral and usually at a penal rate, distinct from the routine MSF window.
- It underpins financial stability; the RBI also acts through tools like moratoria, resolution and merger of weak banks (for example arranging the rescue of a failing bank).
- Deposit insurance through the DICGC (cover raised to 5 lakh rupees per depositor) complements this role in protecting small depositors.
"Lender of last resort" is a standard textbook function of the RBI and a common one-liner in central-banking questions, often paired with the other RBI functions.
Lender of last resort (emergency support to prevent systemic panic) versus the everyday MSF (a routine overnight standing facility); the role targets illiquidity, not insolvency, and is not a free bailout.
The RBI's role of giving emergency funds to a solvent but illiquid bank to prevent panic; one of its core central-bank functions.