The correct option is 1 and 3 only
Explanation
The 'Lender of Last Resort' is a critical function of the Central Bank (Reserve Bank of India). It ensures the stability of the banking system by providing liquidity support to commercial banks that are solvent but face temporary liquidity mismatches and cannot raise funds from other sources.
Statement-wise Analysis
- Statement 1 is Correct: The Lender of Last Resort function is performed by the Central Bank (RBI) for commercial banks. When banks exhaust all other avenues to raise funds, they approach the Central Bank to meet their financial obligations and prevent failure.
- Statement 2 is Incorrect: The Central Bank does not lend funds without security. Following the classic banking principle (Bagehot’s Dictum), the Central Bank lends against eligible securities (collateral), such as government bonds or other approved assets. It is not an unsecured lending facility.
- Statement 3 is Correct: By providing necessary liquidity during crises, the Central Bank ensures that banks do not collapse due to temporary cash crunches. This guarantee of solvency and liquidity enables commercial banks to maintain public confidence and continue their lending operations, thereby helping them to create credit in the economy.
Key Takeaway
The
Lender of Last Resort function prevents bank runs and systemic contagion by providing secured liquidity to banks, thereby sustaining the credit creation process and financial stability.