There is trust between the borrower and the bank. The bank is trusting that the borrower will repay the loan. The bank can do a lot of due diligence on the borrower to be reasonably confident that the lender will repay. But ultimately there will be some trust involved.
The external costs of failure – the costs that are not borne by the bank and are, therefore, unlikely to be taken into account in its own planning – are therefore greater. The RBI has therefore introduced prudential measures to address the extent to which banks can borrow and lend in the call money market in relation to the net worth.