Top 10 Main Important Functions of Central Bank
- (1) Monopoly of Note Issue: Central bank has the monopoly and sole right to issue the currency notes. ...
- (2) Banker to Government: The Central bank kept other banks funds and treasuries with free of interest. ...
- (3) Bankers’ bank: All other banks in the country have to keep a certain proportion of their total deposits as reserve with Central Bank. ...
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- Minimum Reserve system. Whatever may be the system three basic principles are to be followed. They are (i) Uniformity (ii) Security and (iii) elasticity.
- Banker to the Government: The Central Bank acts as the banker, financial agent and advisor to the government. The surplus money of the government is kept with the Central Bank.
- Banker to the banks: The Central Bank Acts as the bankers’ bank. As such it performs the following functions: Custodian of cash reserves of commercial banks: The commercial banks of the country are required to keep a certain percentage of their deposits with the Central Bank.
- Act as custodian of National reserves: Central Bank is the custodian of nation’s gold and foreign exchange reserves. Previously, to some extent, the value of a currency depends upon the gold reserves or foreign exchange reserves held as the backing for the currency.
- Issue of Currency: The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money.
- Banker to Government: ADVERTISEMENTS: Central bank functions as a banker to the government—both central and state governments. It carries out all banking business of the government.
- Banker’s Bank and Supervisor: There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning.
- Controller of Credit and Money Supply: Central bank controls credit and money supply through its monetary policy which consists of two parts—currency and credit.
- Monopoly of Note-Issue. In early banking, every bank has the practice of issuing currency notes, which lacking similarity, losing public confidence, causing inflation and ultimately failure of the banks.
- Bankers to the State. Another most important function of central bank is that it acts as a banker to the state or government. It accepts cash deposits and cheques of the government and other incomes of the government like taxes etc and provides cash requirements for payment of salaries, wages and for their expenditure.
- Banker’s Banks. Central bank also performs the duties of banker for other banks of the country. It is also acts as banker’s bank. All the member banks are required to keep prescribed percentage of reserve with the central bank to provide financial protection to the member banks.
- Lender of the Last Resort. Central bank also acts as the lender of the last resort. In difficult time a person can get help from commercial bank. But in case of bank, his financial requirements are fulfilled only by the central bank.
- Issue money. The Central Bank will have responsibility for issuing notes and coins and ensure people have faith in notes which are printed, e.g. protect against forgery.
- Lender of Last Resort to Commercial banks. If banks get into liquidity shortages then the Central Bank is able to lend the commercial bank sufficient funds to avoid the bank running short.
- Lender of Last Resort to Government. Government borrowing is financed by selling bonds on the open market. There may be some months where the government fails to sell sufficient bonds and so has a shortfall.
- Target low inflation. Many governments give the Central Bank a target for inflation, e.g. the Bank of England has an inflation target of 2% +/- 1. See: Bank of England inflation target.
- Monopoly in issuing currency notes: Formerly in certain countries, many banks issued their own notes. This resulted in uncontrolled confusion. Hence, gradually the right of note issue was withdrawn from ordinary banks.
- Bank To The Government: This function of a central bank may be studied under the following two heads.
- As Banker To The Government : As governments banker, the central bank keep the deposits or banking accounts of government departments boards and enterprises.
- As An Agent Of The Government: As an agent of the government the central bank is often entrusted with the management of the public debt and issue of new loans and treasury bills on behalf of the government.
Nov 11, 2019 · Credit control is one of the most essential functions of central bank i.e., regulating the volume and direction of bank loans. The level of credit creation and money supply determine many things like employment, income and level of prices in the country. (6) Maintenance of Exchange Rate
- Bank of Issue: Central bank now-a-days has the monopoly of note-issue in every country. The currency notes printed and issued by the central bank are declared unlimited legal tender throughout the country.
- Banker, Agent and Adviser to the Government: Central bank, everywhere, performs the functions of banker, agent and adviser to the government.
- Custodian of Cash Reserves: All commercial banks in a country keep a part of their cash balances as deposits with the central bank, may be on account of convention or legal compulsion.
- Custodian of Foreign Balances: Under the gold standard or when the country is on the gold standard, the management of that standard, with a view to securing stability of exchange rate, is left to the central bank.
- Regulator of Currency: The central bank is the bank of issue. It has the monopoly of note issue. Notes issued by it circulate as legal tender money. It has its issue department which issues notes and coins to commercial banks.
- Banker, Fiscal Agent and Adviser to the Government: Central banks everywhere act as bankers, fiscal agents and advisers to their respective governments.
- Custodian of Cash Reserves of Commercial Banks: ADVERTISEMENTS: Commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposits liabilities with the central banks.
- Custody and Management of Foreign Exchange Reserves: ADVERTISEMENTS: The central bank keeps and manages the foreign exchange reserves of the country. It is an official reservoir of gold and foreign currencies.
Functions of a central bank may include: setting an official interest rate – used to manage both inflation and a country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms controlling a state's entire money supply acting as a government's banker and as the bankers' bank (" lender of last resort ")
- Accepting Deposits: The most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks.
- Giving Loans: The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income.
- Over-Draft: Banks advance loans to its customer’s upto a certain amount through over-drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest.
- Discounting of Bills of Exchange: This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills.