When commercial banks fail to meet their financial requirements from other sources, i.e., in case of financial emergency, they approach the central bank to give loans and advances as ‘lender of the last resort’.
It means that if a commercial bank fails to get financial accommodation from anywhere, it approaches the central bank as a last resort.
Central bank advances loans to such a bank against approved securities.
By offering loans to the commercial banks in situations of emergency, the central bank ensures:
- That the banking system of the country does not suffer any set-back, and
- The money market remains stable.