CENTRAL BANK

The central Bank is the head of the banking system of a country. Central Bank occupies an important place in the monetary and banking system of every country. It is responsible for maintaining the economic stability of a country. In the words of Will Rogers, “There have been three great inventions since the beginning of time: fire, the wheel and the central banking”.

The Reserve Bank of India (RBI) is the central bank in India. The Reserve Bank of India was inaugurated in April 1935 under the Reserve Bank of India Act,1934.

Definitions

Central Bank has one function. It operates to control economy, supply of money and credit. –Samuelson

A central bank is a bank which constitutes the apex of the monetary and banking structure of its country. – De Kock

Functions of Central Bank

1)      Issuing of Notes- In modern times, central bank alone has the exclusive right to issue notes in every country of the world.

2)      Banker to the Government- Central Bank act as a banker, agent and financial advisor to the government. As a banker to the government it keeps the accounts of all government banks and manages government treasuries. It performs the same functions for the government as the commercial banks do for their customers.

3)      Banker’s Bank- It performs the functions if a banker to all other banks in the country. Central bank has almost same relation with all other banks as commercial bank has with its customers.

4)      Lender of the last Resort- The central bank also acts as lender of last resort for the other banks of the country. It means if a commercial bank fails to get financial accommodation from anywhere, it approaches the central banks as a last resort. Central bank advances loan to such bank against approved securities.

5)      Custodian of the Nation’s Reserves of Foreign Exchange- Central bank also functions as the custodian of the nation’s foreign exchange reserve. It is the responsibility of the central bank to keep the external value of country’s currency stable. To promote international trade and stabilize exchange rate, central bank maintains reserves of foreign exchange.

6)      Supervision of Banks- Central Bank has the responsibility for the development of an adequate and sound banking system in India. RBI has wide powers of supervision and control over commercial banks related to licensing, establishment, branch expansion etc.

7)      Clearing House Function- Central bank also performs function of clearing house. Every bank keeps cash reserve with the central bank. The claims of banks against each other can be easily settled by simple transfer from and to their account.

8)      Control of credit- The most important function of the central bank is to control the credit activities of the commercial banks. Credit control refers to the increase or decrease in the volume of credit according to monetary requirement of the country. Expansion of credit money more than requirement leads to situation of inflation. Greater contraction of credit money leads to situation of deflation. Central bank seeks to maintain credit money within reasonable limit.

9)      Collection of Statistics- Central bank collects a variety of statistical information and publishes them periodically. This data plays vital role in the formulation of planning and decision making. These statistics facilitate comparative study of economic situation of different countries.

10)   Other Functions- Some other functions performed by the central bank are-

-          Provides facilities of agricultural credit.

-          Represents their country in International Monetary Conferences.

-          Organize Money and bill market in the country.

-          Gets old and torn notes and issues new ones in their place.

Methods of Credit Control/ Instruments of Monetary Policy

Difference between Central Bank and Commercial Bank

Basis of Comparison	Central Bank	Commercial Bank
1)  Main Objective	Public welfare	Profit making
2)  Direct Contact	It does not have direct contact with public.	It has direct contact with public.
3) Government Sector	It is government institute.	It can be government or private.
4) Competition	It does not compete with commercial banks.	It competes with other banks.
5)  Issue of notes	It has right to issue note.	It does not has right to issue notes.
6)  Control	It controls banking system of the country.	It works under control of central bank.
7)   Foreign Exchange Reserve	It functions as the custodian of the nation’s reserves of foreign exchange.	It takes permission of central bank in foreign exchange related activities.
8)  Banker to the Government	It acts as a banker to the government.	It works as representative of central bank to perform various government activities.
9)   Banker’s Bank	It is bank of commercial and other banks.	It has to keep some percentage of total cash deposits with central bank.
10)   Credit Control	t controls the credit.	It controls credit as representative of central bank.