The total amount of deposits held by all commercial banks in the country is much larger than the total size of their resources. If all the account holders of all commercial banks in the country want their deposits back at the same time, the banks will not have enough means to satisfy the need of every account holder and there will be bank failures. The Reserve Bank of India plays a crucial role here.
In case of a crisis like the above, it stands with the commercial banks as a guarantor and extends loans to ensure the solvency of the latter. This system of guarantee assures individual account holders that their money will be returned in case of a crisis and there is no need to panic thus, avoiding bank failures. This role of the RBI as the monetary authority is known as ‘the lender of last resort’.
