Q.Why is the RBI called the "lender of last resort"?

This title captures the RBI's role as the one lender a genuinely solvent bank can always fall back on when every other source of short-term funds has been exhausted. …

As the banker's bank, the RBI holds part of every scheduled commercial bank's reserves (the Cash Reserve Ratio) and provides banks with short-term accommodation in times of need. If a bank faces a sudden, temporary shortage of funds — for instance, unexpectedly heavy withdrawals — and has exhausted all other normal sources of borrowing (the inter-bank money market, other financial institutions), it can approach the RBI as the final source of funds.

The RBI's willingness to lend in such situations, provided the bank is fundamentally solvent (its assets genuinely exceed its liabilities) and only illiquid (temporarily short of cash), is what earns it the title "lender of last resort." This function is critical to financial stability: without such a guaranteed backstop, even a single well-run bank's temporary cash crunch could trigger panic withdrawals (a "bank run") that spread to otherwise healthy ban …

Confusing 'lender of last resort' (helping a solvent bank with a liquidity problem) with bailing out an insolvent bank — the RBI's guarantee applies to genuine liquidit …