4 Marks Question

Question

Explain the functions of Central Bank.

Vidyadip · Accepted Answer

The Central Bank performs the following important functions:

Issue of currency authority: The Central Bank is the sole authority for the issue of currency in the country. Notes issued by it are circulated as legal tender money. It has its issue department which issues notes and coins. Coins are manufactured in the government mint but they are put into circulation through the Central Bank. While issuing currency notes, a minimum fixed amount of gold and foreign currencies is kept by the Central Bank. The monopoly of issuing notes vested in the Central bank ensures uniformity in the notes issued which helps in facilitating exchange and trade within the country. By having a monopoly of note issue, the Central Bank can restrict or expand the supply of cash according to the requirements of the economy.
Banker to the government: The Central Bank acts as a banker to the government in various respects:

The Central Bank accepts receipts and makes payment for the government and carries out exchange, remittance and other banking operations.
It provides short-term credit to the government.
It provides foreign exchange to the government to repay external debt.
It manages public debt, i.e., to manage all new issues of government loans.
It advises the government on banking and financial matters.

Banker's bank and supervisor. The Central Bank acts as a banker and supervisor to commercial banks in various respects.

It provides financial assistance to banks by discounting their bills and through loans and advances against approved securities. The commercial banks are required to maintain a certain percentage of liabilities with the Central Bank. The sole aim of these reserves is to enable the Central Bank to provide financial assistance in times of financial emergency.
Itsupervises, regulates and controlsthe activities of commercial banks.
It provides the commercial banks with centralized clearing and remittance facility.

Controller of credit: Supply of credit must be controlled so as to ensure the smooth functioning of the economy. For this purpose, Central Bank adopts quantitative and qualitative methods of credit control. Quantitative methods such as bank rate, open market operations, variable reserve ratio aim at controlling cost and availability of credit while the qualitative methods such as margin requirements, direct action, rationing of credit and moral suasion influence the use and direction of credit.
Lender of the last resort: The Central Bank acts as a lender of the last resort for commercial banks. When commercial banks fail to meet obligations of their depositors, the Central Bank comes to their rescue. The Central Bank advances necessary credit against eligible securities subject to certain terms and conditions. This saves banks from a possible breakdown. The Central Bank supervises, regulates and controls the commercial banks. The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, amalgamation and liquidation. The control is exercised by periodic inspection of banks and the returns filed by them.

Answer