In India, the Central bank’s function as the ‘Lender of last resort’ usually refers to which of the following? ​ 1. Lending to trade and industry bodies when they fail to borrow from other sources ​ 2. Providing liquidity to the banks having a temporary crisis ​ 3. Lending to governments to finance budgetary deficits ​ Select the correct answer using the code given below. ​

The correct answer is B) 2 only. Lender of last resort means the central bank steps in to provide liquidity to banks or financial institutions facing a temporary crisis, so that a solvent bank does not collapse for want of cash. In India, RBI does this mainly under Section 18 of the RBI Act, 1934, by lending to scheduled banks against eligible securities.

Statement 1 is wrong. RBI's lender of last resort role is confined to the banking and financial system. Trade and industry bodies borrow from commercial banks, financial institutions and the bond market, not from RBI as a lender of last resort.

Statement 3 is wrong. Financing budgetary deficits is monetary financing, which RBI avoids. Ad hoc Treasury Bills, which allowed automatic deficit financing, were discontinued from April 1997. Government borrowing now happens through market loans, and Ways and Means Advances are short-term and limited.

The concept links to Mains GS-III on financial stability, the RBI's regulatory role, and the lessons of banking crises. Expect questions on how liquidity support differs from solvency support.

Trap: aspirants see 'RBI lends to government' or 'RBI lends to industry' and mark those statements correct. The phrase refers only to emergency liquidity for banks.