CENTRAL BANKS

CENTRAL BANKS

Meaning of central banks : CENTRAL bank is supreme monetary institution which is at the apex of monetary and banking structure of a country. It is leader of money market and controls,supervises,regulates the activities of commercial banks.  It is central monetary authority which manages the currency and credit policy of the economy and functions as a banker to government as well as to commercial banks.

Functions of central bank

a)Note issue : The central bank has the sole monopoly of note issue in almost every country. The currency notes are issued and printed by the central bank.In  India, one rupee notes are issued by Ministry of Finance and all other notes are issued by Central Bank I.e Reserve Bank of India.It brings uniformity in monetary system of note issue and note circulation.

b)Banker,Agent and adviser : The central bank functions as banker ,agent and adviser to the government.

As a banker to government , it performs same function for government as a commercial banks performs for its customers. It maintains accounts of central as well as state government.

As a agent to government , it collects taxes and other payment on the behalf of government.It raises loans from the public and thus manages public debt.

As a financial adviser to the government, it gives advise to government on economic , monetary,financial,fiscal matters such as deficit management,devaluation,trade policy etc.

c)Banker's bank : The central bank act as Banker's bank  for the commercial banks. It performs the functions of providing bank lockers to the commercial bank.

d)Custodian of cash reserves : The central bank maintains cash reserves of commercial banks. The cash reserves of commercial bank in the central bank can be utilised by the commercial banks in the times of emergency.It can be used to promote national welfare also.

e) Lender of last resort : The central bank act as the lender of last resort. In case,the commercial banks are not able to meet their financial requirements from other sources they can then approach central banks. It enables the central bank to exercise it's control over banking system .

f)Clearing agent :The central bank acts as the Clearing house for these banks. The central bank can easily settle the claims of various banks against each other with least use of cash. it reduces the withdrawal of cash and these enable the commercial banks to create credit.

g) Custodian of foreign exchange reserves : This function helps the central bank to overcome the balance of payment difficulties and to maintain stability in the exchange rate .In order to minimize the fluctuations in foreign exchange rates,the central bank buys foreign currencies in the market as the value of foreign currencies falls.

h) Controller of credit :Controlling credit is most important function of the central bank. By controlling the credit effectively the central bank establishes stability not only in price level internally but also in foreign exchange rates .This stability is necessary for economic growth and smooth functioning of economy.

I) Developmental role : In underdeveloped or developing countries,the central bank besides performing traditional functions ,also performs Developmental and promotional functions,the central banks on the one hand helps to develop money and capital markets and on the other hand ,undertakes suitable measures to promote economic development and maintain price and exchange rate stability.

j)other functions 

1)It maintains relations with international institution such as IMF,World bank etc.

2)It collects statistics providing information about current state of the Economy.

3)It conducts surveys,seminars and published reports on the matter.

4)It helps in developing banking system and banking habits in the Economy.

5)It formulates monetary policy to deal with economic crisis of the economy.

6)It extends training facilities to the staff working in various banking institution.