Question

State with reasons whether you agree or disagree with the following statements.

1. Central Bank is the Bank of Issue.
2. A co-operative bank acts as a lender of the last resort.
3. Credit control is the function of the Central Bank of the country.
4. Central Bank is a profit-making institution.
5. Central Bank having monopoly of note issue is most appropriate institute of the government.

Answer 1

1. Yes, the above statement is true. The Central Bank is the sole entity that can print currency notes. In other words, the central bank of a country has the exclusive authority to issue currency (notes + coins). The currency issued by the central bank is known as 'legal tender money' i.e. the value of such currency is backed by the central bank. Since, issuance of notes is exclusively reserved for the Central Bank, it is said to be the ‘Bank of Issue’.

2. No, the given statement is not correct. This is because it is the Central Bank that acts as the lender of last resort for the commercial banks and the government. When a commercial bank faces financial crisis and fails to obtain funds from other sources, the central bank plays the vital role of ‘lender of last resort’ and provides them with financial assistance in the form of credit.

3. Yes, the above statement is correct. Credit control refers to the control on the quantum of credit and the direction of its flow in the economy. This is done to achieve growth with stability. Therefore, we can say that credit control is the function of the central bank of a country. The Central Bank can use various quantitative and qualitative measures for controlling credit in the economy.

4. No, this statement is not correct. This is because the main objective of the Central Bank is to regulate and control the activities of all the commercial banks and other financial institutions of the country. It also plays a pivotal role in the organisation and development of a sound monetary and financial system in an economy. However, profit making is not the objective of the Central Bank.

5. Yes, the above statement is correct. The Central Bank is the most appropriate institute of the government for issuance of notes. This is because of the following points:

i. It ensures uniformity in note making.
ii. It ensures a control on the issuance of notes and thus, controls the overall issue of currency.
iii. It increases the confidence of the public in the currency, as there is uniformity in it.
iv. Since there is just one agency for the issuance of notes, it becomes convenient for the government to supervise and monitor its operations.