Question

Discuss the functions of the central bank as a 'Banker of Banks' and 'Banker to the Government'.

Answer 1

Functions of the central bank as a 'Banker of Banks' and 'Banker to the Government' :-

• (i) Banker's Bank: The central bank is the bank for all the commercial banks in the country. The relations of central bank with other banks are similar to those of a bank with its customers. As a matter of legal obligation, the commercial banks have to keep certain portion of their deposits with the central bank as cash reserves. These cash reserves enable the central bank to exercise control of the issue of credits by the commercial banks, thereby keeping the entire credit-system. The central bank also allows the facility of short-term loans and discounting of the bills to the commercial banks and it also advises the other banks related to their business, like fixation of rate of interests on deposits and loan etc.
  

• (ii) Banker to the Government: The central bank makes and receives payments on behalf of the Government whenever it becomes necessary. It also floats public debt and manages it for a shorter or longer period as the case may be, for the Government. It supplies foreign exchange to the Government for repaying external debt or making other payments.