Explain the various functions performed by Central Bank.
Central bank is
an apex bank that controls the entire banking system of a country. It is the
sole agency of note issuing and controls the supply of money in the economy. It
serves as the banker of the government and manages foreign exchange of the
government. The various functions performed by central bank are :-1. Bank of issuing notes: Central bank has monopoly
rights of issuing notes. This is called currency authority function of central
banks. All notes issued by central bank are an unlimited legal tender in the country.
2. Banker to the Government: Central bank is a banker,
agent and financial adviser to the government. It manages the account of the
government, it buys and sells the securities of the government and it frames
policies to regulate the money market.
3. Custodian of foreign currency: The central bank maintains a minimum reserve of international currency all the time in order to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.
4. Lender of last resort: The central bank also lends money to commercial banks. When the commercial banks are facing liquidity crunch or any type of insolvency, the central bank are the last resort to provide loans against treasury bills, government securities, and bills of exchange.
5. Maintains cash reserves of commercial banks: The central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain amount of public deposits as cash reserve, with the central bank.
6. Control of credit: The central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. Therefore, they have the power to control the amount of credit creation of commercial bank.
1. Bank of issuing notes: Central bank has monopoly rights of issuing notes. This is called currency authority function of central banks. All notes issued by central bank are an unlimited legal tender in the country.
2. Banker to the Government: Central bank is a banker, agent and financial adviser to the government. It manages the account of the government, it buys and sells the securities of the government and it frames policies to regulate the money market.
3. Custodian of foreign currency: The central bank maintains a minimum reserve of international currency all the time in order to meet emergency requirements of foreign exchange and overcome adverse requirements of deficit in balance of payments.
4. Lender of last resort: The central bank also lends money to commercial banks. When the commercial banks are facing liquidity crunch or any type of insolvency, the central bank are the last resort to provide loans against treasury bills, government securities, and bills of exchange.
5. Maintains cash reserves of commercial banks: The central bank takes care of the cash reserves of commercial banks. Commercial banks are required to keep certain amount of public deposits as cash reserve, with the central bank.
6. Control of credit: The central bank has power to regulate the credit creation by commercial banks. The credit creation depends upon the amount of deposits, cash reserves, and rate of interest given by commercial banks. All these are directly or indirectly controlled by the central bank. Therefore, they have the power to control the amount of credit creation of commercial bank.
