FUNCTIONS OF A CENTRAL BANK

The Central Bank is the highest authority in the banking sector and it supervises, controls and regulates the monetary and financial activities of the banking sector in a country. Central Bank is also known as the apex bank in a country. In India, Reserve Bank of India (RBI) is the Central Bank. One of the pivotal features of Central Bank is that it has complete or residuary monopoly over note issue in a country. The function of central bank are as follows:

ISSUER OF CURRENCY

The Central Bank has the monopoly right to issue currency in a country and control the volume of currency and credit. The currency which issued by the apex bank is the legal currency and is circulated in the country. Generally, Central Banks issues currency by having a reserve backup. As of India, RBI has a minimum reserve of Rs.200 crores in form of gold of value Rs.115 crores and Rs.85 crores in form of foreign securities.

BANKER TO THE GOVERNMENT

Just like how the commercial banks are to the public, the Central Bank acts as a banker to the government. It also accepts deposits and provide loans to the government. Central Bank accepts receipts and make payments, provides loans and advances and provide remittance services just like banks.

BANKER’S BANK AND SUPERVISOR

Central Bank acts as a banker’s bank :

  • It is a custodian of their cash reserves.
  • It is the lender of last resort.
  • It acts as a clearing house for member banks.

CONTROLLER OF CREDIT AND MONEY SUPPLY

Central Bank controls money supply and credit through monetary policy. It controls the volume of currency by restricting its issue and controls credit through various qualitative and quantitative measures.

EXCHANGHE CONTROL

The next function is to maintain the exchange value of currency. In exchange control system in India, every citizen has to deposit the foreign exchange he receives with the RBI. For securing foreign exchange, it must make an application to the RBI in the prescribed form.

LENDER OF LAST RESORT

During emergency situations where commercial banks are unable to fulfil the obligations of their depositors, they approach the Central Bank as the lender of last resort. Central Bank rediscounts its eligible securities and provide loans against these securities. It prevents the banking system from a failure or breakdown.

CUSTODIAN FOR FOREIGN EXCHANGE RESERVES

The Central Bank is responsible for maintaining the external value of the currency and thus maintains some gold and foreign currencies so that in the event of fluctuations, Central Bank buys and sells foreign exchange in the market to minimize the effect.

CLEARING HOUSE FUNCTION

The Central Bank acts as a Clearing House for its member banks. Banks receive cheque drawn on other banks from customers which has to be realized from drawee’s bank. Cheques are also drawn and passed on to other banks which also needs to be realized from drawee bank. Central Bank allows other banks to come together to set off their cheque claims without physical movement of money through the clearance facility.

PUBLICATION OF DATA

Finally, the Central Bank also collects and publishes various statistical data relating to the banking and financial sectors of the economy.

Relevant links:https://hscprojects.com/central-bank-functions-economics-project/#:~:text=The%20main%20function%20of%20a%20central%20bank%20is,during%20times%20of%20bank%E2%80%99s%20insolvency%20or%20financial%20crisis.

https://en.wikipedia.org/wiki/Reserve_Bank_of_India