Central Bank - Meaning and Functions

SPECTRUM STUDY CIRCLE 15/22 2

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FLOOR ASHOK NAGAR ND-18 (PH – 55711031, 9810378235) Central Bank – Meaning and Functions

Meaning: In every country, there is one apex institution which acts as the leader of the money market. In supervises, regulates and controls are activities of commercial banks and other financial institutions. Such an institution is called as the central bank of the country. In India, RBI acts as a central Bank of the country. Functions: De Kock has mentioned seven important functions of a central Bank. They are: 1. Bank of Issue: It is the primary and very important function of a central Bank. Now a days central Bank in every country has been given the sole right of note-issue. In ancient times issue of currency metallic coins used to be exclusive privilege of the ruler as a matter of fact, circulation of currency determined the title of a particular ruler or king over the territory. The coins used to serve as the seal of the king with the issue in circulation of paper currency notes, this right came to be concerned with the state. Paper notes were put in circulation in place of metallic coins and were declared unlimited legal tender, i.e. paper notes acquired legal authority to be accepted as means of payments in all the transactions. Gradually, however it was realised that the concentration of the right of note issue with the state renders the currency unstable. The state could always resort to over-issue of currency notes for meeting its financial needs. Consequently, the function of note issue came to be performed by the banks. Presently, in almost all the countries in the world, the right of note-issue is the monopoly of the central bank. 2. Banker, Agent and Financial Advisor to the Govt.: As banker to the

govt. the central Bank makes and receives payments on behalf of the govt. It helps the govt. With short-term loans and advances in times of difficulties. As govt. agent, the Central Bank also acts as advisor to the govt. specially on monetary, banking and financial matters. 3. Banker to the Banks: The Central Bank bears the same relationship to

the commercial banks as the commercial banks maintain with the general public. The central banks acts as the bankers’ bank. The commercial banks deposit their surplus cash reserves with the Central Bank and similarly borrow from the central bank when the need arises. In the earlier times smaller commercial banks used to look upon their ‘big brothers’ for this type of services. Gradually, as the relatively big banks began to act as banks of issue and govt’s bankers, the commercial banks began to look upon the as their

bankers. The cash reserves of the commercial banks came to be centralized with the central bank.

4. Custodian of Foreign Exchange Balances of the country: The

central Bank performs two major functions in the field of foreign exchange: (a) It has become the custodian of the country’s reserves of international currencies, and (b) The maintains stability of the exchange rate of the currency. All the foreign exchange transactions of a country are routed through the central bank of the country. All the expenses in foreign currency whenever required are incurred though the agency of this bank. Similarly, all foreign exchange earnings have to be deposited with the central bank.

5. Lender of the Last Resort: As commercial banks lend to the

individuals, the central bank lends to the commercial banks in times of emergencies. Thus the central bank assumes the responsibility of meeting directly or indirectly all reasonable demands for funds by commercial banks in times of difficulties and crisis. A commercial bank can borrow from the central bank against eligible securities.

6.

Bank of central Clearance: Economists lie shaw, willis and Jauncey consider the function of a clearing house as the most important function of the central bank. Because Central bank keeps the cash balance of all commercial banks, it is easier for member banks to adjust their claims against each other in the books of the central bank. This system of clearing agreements facilitates transfer of funds quickly safely and at low cost.