If this results in non-payment, the bank which has lent the funds could itself face liquidity problems if it has also borrowed on an overnight basis to lend to this bank. The risk of financial contagion could also arise if other banks in the system that are similarly placed become affected by such concerns.
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.