RBI as Banker of Banks
RBI is bank of all banks in India. As per the Banking Regulations Act 1949, Banks have to keep a portion of their demand and time liabilities as cash reserves with the Reserve Bank, thus necessitating a need for maintaining accounts with the Bank.
Earlier, (originally in the BR act) it was as follows – 5% of demand liabilities and 2% of time liabilities. But now it is the portion of Net Demand and Time Liabilities (NDTL).
So, the RBI provides banks with the facility of opening accounts with itself. This is the 'Banker to Banks' function of the Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) of RBI at regional offices.
The banks can borrow from the RBI on the basis of eligible securities or any other arrangement and at the time of need or crisis, they approach RBI for financial help. Thus RBI works as Lender of the Last Resort (LORL) for banks.