Lender of last resort’ (LoLR) is an exclusive function of central banks including the RBI, where it lends money to support a financial institution like a bank when the latter is facing severe liquidity problems. The LoLR is thus to overcome a temporary liquidity problem for a bank, whose failure of the financial institution is likely to have systemic implications.
The LoLR facility comes only at the time of financial stringency and this may help the bank to escape from a liquidity crisis. Thus, LoLR is a financial safety net provided by the central bank to the banking system.
