Explain 'Bankers' Bank' function of the central bank.
Explain 'Bankers' Bank' function of the central bank.
Being the apex bank, the central bank acts as the banker to other banks in three capacitites:
(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the Central Bank (known as Cash Ratio). In this way, Central Bank acts as a custodian of cash reserves of commercial banks.
(ii) As lender of the last resort, the Central Bank extends loans to commercial banks when all other sources of raising funds are practically closed.
(iii) It acts as a bank of central clearance, settlements and transfers. As all commercial banks have their accounts with the Central Bank, it can easily settle claims of various commercial banks against each other by making debit and credit entries in their accounts. As a supervisor, the Central Bank regulates and controls the commercial banks by taking care of their licensing, branch expansion, etc.
Being the apex bank, the central bank acts as the banker to other banks in three capacitites:
(i) It is the custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the Central Bank (known as Cash Ratio). In this way, Central Bank acts as a custodian of cash reserves of commercial banks.
(ii) As lender of the last resort, the Central Bank extends loans to commercial banks when all other sources of raising funds are practically closed.
(iii) It acts as a bank of central clearance, settlements and transfers. As all commercial banks have their accounts with the Central Bank, it can easily settle claims of various commercial banks against each other by making debit and credit entries in their accounts. As a supervisor, the Central Bank regulates and controls the commercial banks by taking care of their licensing, branch expansion, etc.
