Assignment Topic: What Is Central Bank?

Name: Abdul Wajid Course: Macro Economics
Roll No: N/A Course Teacher: Miss Fazeela
Assignment Topic
Central Bank and its Function
What is Central Bank?

A national bank that provides financial and banking services for its
country's government and commercial banking system, as well as
implementing the government's monetary policy and issuing
currency.
8 Major Functions of Central Bank – Discussed!
Bank of Issue
Banker, Agent, and Advisor to Government,
Custodian of Cash Reserves,
Custodian of Foreign Balances,
Lender of Last Resort,
Clearing House,
Controller of Credit,
Protection of Depositor’s Interest.
1) Bank of Issue:
Central bank nowadays 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.
The central bank has been given an exclusive monopoly of note-issue in the
interest of uniformity, better control, elasticity, supervision, and simplicity. It
will also avoid the possibility of over-issue by individual banks.
The central banks, thus, regulate the currency of the country and the total
money supply in the economy. The central bank has to keep gold, silver, or
other securities against the notes issued. The system of note-issue differs
from country to country.
The main objects of the system of currency regulation, in general, are to see
that:
(i) People’s confidence in the currency is maintained,
(ii) Its supply is adjusted to demand in the economy.
Thus, keeping in view the aims of uniformity, elasticity, safety, and security,
the system of note-issue has been varying from time to time.
2) Banker, Agent, and Adviser to the Government:

The central bank, everywhere, performs the functions of a banker, agent,
and adviser to the government.
“The central bank operates as the government’s banker, not only because it
is more convenient and economical to the government, but also because of
the intimate connection between public finance monetary affairs.”
As a banker to the government, it makes and receives payments on behalf
of the government. It advances short-term loans to the government to tide
over difficulties.
It floats public loans and manages the public debts on behalf of the
government. It keeps the banking accounts and balances of the
government after making disbursements and remittances. As an adviser to
the government, it advises the government on all monetary and economic
matters. The central bank also acts as an agent to the government where
general exchange control is in force.
3) Custodian of Cash Reserves:
All commercial banks in a country keep a part of their cash balances as
deposits with the central bank, maybe on account of convention or legal
compulsion. They draw during busy seasons and payback during slack
seasons. Part of these balances is used for clearing purposes. Other
member banks look to it for guidance, help, and direction in a time of need.
It affects the centralization of cash reserves of the member banks. “The
centralization of cash reserves in the central bank is a source of great
strength to the banking system of any country. Centralized cash reserves
can at least serve as the basis of a large and more elastic credit structure
than if the same amount were scattered amongst the individual banks.
4) 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 the stability of
exchange rate, is left to the central bank.
After World War I, central banks have been keeping gold and foreign
currencies as reserve note-issue and also to meet the adverse balance of
payment, if any, with other countries. It is the function of the central bank to
maintain the exchange rate fixed by the government and manage exchange
control and other restrictions imposed by the state. Thus, it becomes a
custodian of the nation’s reserves of international currency or foreign
balances.
5) Lender of Last Resort:
The central bank is the lender of last resort, for it can give cash to the
member banks to strengthen their cash reserves position by
rediscounting first-class bills in case there is a crisis or panic which
develops into a ‘run’ on banks or when there is a seasonal strain.
Member banks can also make advances on approved short-term
securities from the central bank to add to their cash resources in the
shortest time.
This facility of turning their assets into cash at short notice is of great use
to them and promotes in the banking and credit system economy,
elasticity, and liquidity.
6) Clearing House:
Central bank also acts as a clearing house for the settlement of accounts of
commercial banks. A clearing house is an organisation where mutual claims
of banks on one another are offset, and a settlement is made by the
payment of the difference. Central bank being a bankers’ bank keeps the
cash balances of commercial banks and as such it becomes easier for the
member banks to adjust or settle their claims against one another through
the central bank.
Suppose there are two banks, they draw cheques on each other. Suppose
bank A has due to it Rs. 3,000 from bank B and has to pay Rs. 4,000 to B. At
the clearing house, mutual claims are offset and bank A pays the balance of
Rs. 1,000 to B and the account is settled. Clearing house function of the
central bank leads to a good deal of economy in the use of cash and much of
labour and inconvenience are avoided.
7) Controller of Credit:
The control or adjustment of credit of commercial banks by the central bank

is accepted as its most important function. Commercial banks create lot of
credit which sometimes results in inflation.
The expansion or contraction of currency and credit may be said to be the
most important causes of business fluctuations. The need for credit control
is obvious. It mainly arises from the fact that money and credit play an
important role in determining the level of incomes, output and employment.
According to Dr. De Kock, “the control and adjustment of credit is accepted
by most economists and bankers as the main function of a central bank. It is
the function which embraces the most important questions of central
banking policy and the one through which practically all other functions are
united and made to serve a common purpose.”
Thus, the control which the central bank exercises over commercial banks as
regards their deposits, is called controller of credit.
8) Protection of Depositors Interests:
The central bank has to supervise the functioning of commercial banks
so as to protect the interest of the depositors and ensure the
development of banking on sound lines.
The business of banking has, therefore, been recognized as a public
service necessitating legislative safeguards to prevent bank failures.
Legislation is enacted to enable the central bank to inspect commercial
banks in order to maintain a sound banking system, comprising strong
individual units with adequate financial resources operating under
proper management in conformity with the banking laws and
regulations and public and national interests.
THANKS
YOU!
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Name: Abdul Wajid Course: Macro Economics

Roll No: N/A Course Teacher: Miss Fazeela

What is Central Bank?

8 Major Functions of Central Bank – Discussed!

2) Banker, Agent, and Adviser to the Government:

4) Custodian of Foreign Balances:

The control or adjustment of credit of commercial banks by the central bank

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