Meaning: - The central bank is the apex bank in the country. It enjoys the apex position in the country’s monetary and banking structure. It regulates and monitors the banking and monetary system in the country.
In India, the Reserve Bank of India is the Central bank it was established in 1935. Some of the prominent central banks include Bank of England. Federal Reserve Bank (USA), People’s Bank of China and so on.
Definitions: - “A central Bank is one which constitutes the apex of the monetary and banking structure of its country, and which performs as best as it can in the national interest, certain functions such as note issue, banker to the government, banker to the banks, and custodian of country’s foreign exchange reserves”.
Defined by................M.H. de Kock
FUNCTIONS OF CENTRAL BANK
MONETARY FUNCTIONS NON-MONETARY FUNCTION
A. MONETARY FUNCTIONS
1. Issue of Currency Notes: -The central bank has the authority to issue currency notes. The RBI enjoys the monopoly of note issue. The RBI has been authorised by the Government of India to issue notes of all denominations except One Rupee note (which at present is rarely in circulation) the one rupee note is directly issued by the government of India.
2. Bankers to the Government: -The Central bank performs the following –
a. It transacts all banking business of the Central Governments. It accepts money on account of the government and makes payment on behalf of the government.
b. It makes temporary advances to the government.
c. It makes extraordinary advances to the government during emergencies.
d. It manages public debt and is responsible for issue of new loans.
e. It advises the government to take measures to control inflation
3. Banker’s Bank: - The Central bank acts as a banker to all other banks in the country. In this respect, the following are the functions of the central banks
· Lender of Last Resort: The Central bank acts as a lender of last resort to commercial banks. Whenever any commercial bank faces liquidity problems, the central bank provides funds to overcome the crisis.
· Custodian of Cash Reserves: -Commercial banks have to maintain a certain percentage of their total deposits in the form of Cash reserve ratio (CRR) with the central bank. The central bank pays interest to the bank on CRR balances.
· Clearing House: The Central bank acts as a clearing house for all the commercial banks. It clears inter-bank transactions. Since all banks have their accounts with the central bank, the claims of banks against each other are settled by simple transfers, i.e by debit and credit entries in their accounts.
4. Controller of Credit: -The Central bank has the responsibility to control the credit in the economy. The central bank regulates the volume of credit and money supply in the country. The credit or money supply is decreased to control inflation. And the credit or money supply is increased so that banks lend more funds to various sectors. Various quantitative and qualitative controls are used by RBI to regulate credit and money supply.
5. Custodian of Foreign Exchange reserves: -A country maintains foreign exchange reserves in form of gold, special drawing rights (SDRs of IMF), the foreign currency. The foreign exchange reserves indicate a sound balance of payments position. A good amount of foreign exchange reserves helps to maintain exchange rate stability.
B. NON-MONETARY FUNCTIONS
6. Supervision of Banks: -The central bank supervises and monitors the working of commercial banks. The RBI is given powers to supervise and monitor the working of commercial banks under the Banking Regulations Act, 1949.
7. Promotion and Development Functions: -The central bank also performs the promotion and development functions. For instance, RBIs set up National Bank for Agricultural and Rural development. (NABARD) to promote agriculture and rural development. It has also set up Export-Import (EXIM) Bank of India, to promote foreign trade.
8. Data collection and publication: -The central bank collects data on various economic matters such as foreign trade, foreign investment in India, investment by Indian firms in the overseas markets, inflation, and so on.
9. Clearance: - The central bank also gives clearance to various proposals or projects involving financial consideration. For instance, it clears joint ventures abroad. It also clears proposal from Indian firms to invest in foreign countries.
