Lender of last resort means , when the commercial banks have no other sources to procure loan, the central bank lends to them after rediscounting its bills of exchange and securities. This situation sometimes arises when the commercial banks have to meet extra demand of their customers for ready cash. They cannot supply according to demand and fall back upon the central bank. The central bank as the lender of the last resort comes to their rescue.
The advantages of this function are as follows :
Commercial banks can carry reserves.
An emergency can easily be faced because of easy economic aid from the central bank.
Important requirements of trade and industry can be met.
The central bank gets a chance to control credit creation.
