Yes I agree with this
statement
Reason:
Central Bank as
Bankers' Bank -The Central Bank functions as a leader and coordinator of
commercial banks in the country. In this capacity, the Central Bank performs
the following functions in relation to commercial banks in the country:
a) The Central Bank acts as a Custodian of
Cash Reserves of commercial banks in the country Every commercial bank keeps
certain percentage of its cash with the Central Bank of the country. At present
keeping a certain percent of cash reserve as a deposit with the Central Bank,
is legally made compulsory. This enables the Central Bank. 1) To have control
over the total amount of credit creation by commercial banks in the country and
thus on the total quantity of money in circulation. 2} By varying, the legal
minimum cash reserve which every commercial bank must keep with the Central
Bank and which is not available to commercial banks as basis of credit
creation, the Central Bank can manipulate the quantity of money, that is in
circulation in the economy according to the policy it has formulated.
b) The Central Bank acts as a "Clearing
House"
Since all commercial
banks keep deposit accounts with the Central Bank, the Central Bank is in a
position to act as clearing house for commercial banks.
Take an illustration.
There is not one commercial bank in the country but there are several
commercial banks. Customers of Bank 'A' may draw cheques in favour of persons
who have accounts with commercial Bank `B' and customers with accounts in bank
'B' may draw cheques in favour of persons who have accounts in commercial bank
'N. Let us suppose that in one month as a result of above transactions bank 'A'
owes ` 50 lakhs to bank 'B' and bank 'B' owes ` 40 lakhs to bank 'A'. Now bank
'A' draws a cheque in favour of bank 'B' for` 10 lakhs only on the central bank
of the country, where all commercial banks have their accounts.
Bank 'A's account is
debited by ` 10 lakhs and bank 'B's account is credited by ` 10 lakhs. Thus the
clearing house system' which becomes possible because all commercial banks keep
their accounts with the central bank of the country, economizes use of cash and
facilitates adjustment of dues between commercial banks by the Central Bank,
with convenience to all commercial banks.
c) The Central Bank advices commercial
banks Advices them if their activities are harmful to commercial banking and
provides accommodation by lending funds in case of difficulties.
d) Lender of the last resort:
The commercial banks
operate on the basis of low cash reserve system. If there is a great demand for
cash by the depositors, even a well managed commercial bank can run into
difficulty. This is because, with low cash reserves, it will not be able to
meet a sudden and large demand for cash. The Central Bank comes to their rescue
at such times. It is the ultimate source of financial assistance to commercial
banks. Just as people go to commercial banks when they want loans, commercial
banks go to the Central Bank of the country in times of their financial
difficulties. Thus, `the lender of the last resort' function of the Central
Bank helps to control
panic and infuses confidence among the banks as well as the public. Hence,
during the financial difficulties or crisis, commercial banks can always depend
upon the Central Bank for the required assistance.
