The activities of central banks are different from the activities of the commercial banks. Central banks of a country look after the national interest rather than after the profit. It is a banker of government and banker’s bank. It does not deal with the public deposits or loans and advances to public. The functions of central bank, as mentioned by banking experts, are performed in the following capacities.
FUNCTIONS OF CENTRAL BANK
~ I
(1) (2) (4)
Sole Authority Banker s to Controller
of Note Issue Government of Foreign
। Exchange
Keeping Keeping Fiscal Financial Foreign Transfer Govt the of Agent Advisor Loans of Capital Securities
deposits Accounts
(3) ’
Banker’s Bank
Custodian Clearing Lender New Advances Growth Redis- ofCash House of Last Banks Poicy of Banks counting Reverse resort
(5) . (6) (7) • (8) (9)
Custodian Leader of Exchange Representative Additional
of metallic Capital Markt Rate of Foreign Trade Functions
reserves Stability t
- (i) Whff Training
(ii) Growth to Saving
(ii) Industrial & Agriculture development
- International Trade
- Membership Fee
- Financial Reports
These functions are performed almost by all the central banks of the several countries of the world although there may be variations in degree of funttions.
- SOLE RIGHT OF NOTE ISSUE:
vIn every country, central bank has sole right or monopoly of note issue. This authority has been given to central bank for:
- Uniformity in the notes.
- To check undue expansion of notes.
^(c) To regulate currency according to its demand.
- To make sure that notes issued are the liability of the bank and get full support of state.
There are following three main methods of note issue^-
- Fixed fiduciary system
- Proportional reserve system
- Minimum reserve system
- BANKER TO THE GOVERNMENT:
The functions of central bank as banker to government can be described as follows:
- Keeping the Deposits:
Central bank keeps the deposits of the central and provincial governments. It makes payments on the behalf of government. However, it does not pay interest on government deposits.
- Advances Loans:
As a fiscal agent, the central bank provides loans to the government and makes investments in Treasury Bills and Long-term Government securities.
- Foreign Loans:
Central bank makes arrangements to get foreign loans on the demand of government.
- Transfer of Capital:
Central bank transfers the capital of central and ‘provincial governments from one place to another.
- Financial Advisor:
Central bank also advises the government on economic matters such as controlling inflation or deflation, devaluation or revaluation of the currency and balance of payments etc.
(vi) Keeping of Accounts:
Central bank keeps the accounts of different departments of govt. It does not charge any fee or commission for said service.
(vii) Govt. Securities:
Central bank is not only the custodian of government securities, but also works for their sale and purchase.
- BANKER’S BANK:
As a banker for the commercial banks, the central bank performs ihe following functions:
(i) Custodian of Cash Reserves:
The commercial banks are required by law to keep reserves equal lo a certain percentage of both time and demand deposit with the central bank.
(ii) Clearing House:
As a banker’s bank, central bank acts as a clearing- house for the •.cttlement of mutual claims of commercial banks. Since the central bank bolds reserves of commercial banks, it transfers funds from one bank to I he other banks to facilitate the clearing of the cheques by making entries on the principles of bookkeeping without using cash.
Lender of Last Resort:
Central bank acts as the lender of last resort for the commercial banks. The central bank lends to the member or scheduled banks in times of stress to save their financial structure.
Re-discounting:
The member commercial banks can re-discount their bills from central bank in the time of need.
Opening of New Bank:
A new bank or a branch of an existing bank cannot be established without the prior permission of central bank.
Advance Policy:
Central bank regulates the policies of advancing loans for commercial banks and fixes the rate of interest to be charged.
Growth of Banks:
It is the duty of the central bank to promote the growth of the banking system on sound footing.
- LEADER OF CAPITAL MARKET:
Central bank is considered as the feader or-guardian of capital market, because it works for its establishment and growth. It also makes policies and takes decisions to avoid undue expansion or contraction of credit and to stable tht credit or money system in the country. The steps taken or methods adopted by central-hank in this regard are called monetary policy.
- CONTROLLER OF FOREIGN EXCHANGE:
Central Bank is responsible for the management of foreign exchange and maintenance of the, external value pf the home currency. Moreover, foreign exchange reserves are also kept with the central bank. It prepares the balance of payments accounts of the country, and helps the government to keep the balance favourable.
- CUSTODIAN OF METALLIC RESERVE:
Central bank is a supervisor or custodian of metallic reserves (gold and silver etc.) of its country. It keeps them with great care and safety. The metallic reserve of commercial banks and other institutions are also kept with central bank.
- EXCHANGE RATE STABILITY:
Central bank fixes the exchange rates of the domestic currency in terms of foreign currencies. It holds these rates within narrow limits in keeping with its obligations as a member of the International Monetary Fund and tries to bring stability in foreign exchange rates.
- REPRESENTATIVE OF FOREIGN TRADE:
Central bank acts as the representative of government in international trade. Besides, making investment in international market, it also provides foreign exchange to im^Drters and exporters of the country.
- MISCELLANEOUS FUNCTIONS:
- Staff Training:
Central bank not only provides modem training of banking to staff, but also establishes training institutes in this regard, (e.g.) Institute of Bankers etc.
(iij Growth to Saving:
- Central bank makes plans and adopts various methods to promote the habit of saving among the people of country.Industrial & Agricultural Development:
Central bank extends loans of different kinds to develop the industrial and agriculture sectors of the country:
- Representation in International Institutions:
Central bank acts as the representative .of government for International institutions like IMF etc.
- Membership Fee:
If the government wants to become the member of international institutions, then central bank pays membership fee (e.g.) SAARC and Security Council etc.
- Financial Reports:
Central bank publishes periodical reports relating to different aspects of monetary and economic policies.
