The primary function of a central bank is to manage the nation's money supply (monetary policy). The basic functions of the Central Banks are:
1. Monopoly of Note-Issue:
Note-issue primarily is
the main function of a central bank in every country. These days, in all the
countries where there is a central bank generally it has got the monopoly or
the sole right of note-issue.
In the beginning this was
not the function of Central Bank but gradually all the central banks have
acquired this function. First of all, Central Bank of England got the right of
note-issue in the year 1844. In actual practice, upto the beginning of
twentieth century, generally central banks were recognized as the banks of
note-issue. In India, R.B.I., the central bank of India has got the right of
note-issue.
As banker to the
government, central bank provides all those services and facilities to the
government which public gets from the ordinary banks. It operates the accounts
of the public enterprises. It manages government departmental undertakings and
government funds and when there is a need gives loans to the government. It
looks after the management of public debt. It accepts the payment of taxes
from the public on behalf of the government and makes payment for the cheques
issued by the government. It also undertakes transactions relating to foreign
currencies on behalf of the government.
Central bank is the bank
of banks. This signifies that it has the same relationship with the commercial
banks in the country which they have with their customers. It provides security
to their cash reserves, gives them loan at the times of need, gives them advice
on financial and economic matters and works as clearing house among various
member banks.
A definite percentage of
deposits of commercial banks are kept as reserve with the central bank. This
leads to centralization of cash reserve and facilitates working of credit
control. These funds are of great significance during the time of emergency.
Central bank is the
custodian of the foreign currency obtained from various countries. This has
become an important function of central bank, these days, because with its help
it can stabilize the external value of the currency. This function has become
highly important after the World Depression of 1929 and the establishment of
the International Monetary Fund.
Central bank works as
lender of the last resort for commercial banks because in the times of need it
provides them financial assistance and accommodation. Whenever a commercial
bank faces financial crisis, central bank as lender of the last resort comes to
its rescue by advancing loans and the bank is saved from being failed. Central
bank helps commercial banks by discounting their bills and securities.
All the commercial banks
have their accounts with the central bank. Therefore, central bank settles the
mutual transactions of banks and thus saves all banks contacting each other
individually for setting their individual transactions, in this way; the
unnecessary cash transactions between individual banks are avoided.
This is a very important
function. These days, the most important function of central bank is to control
the volume of credit for bringing about stability in the general price level
and accomplishing various other socio-economic objectives. There are number of
methods which a central bank may use for controlling the volume of credit such
as bank rate, open market operations, change in reserve ratio and various
selective controls.
Besides the 7 functions
explained above, central banks perform many other functions that are as
follows:
Central banks in almost
all the countries collects statistical data regularly relating to economic
aspects of money, credit, foreign exchange, banking etc. from time to time,
committees and commission are appointed for studying various aspects relating
to the aforesaid problem.
The basic problem of
underdeveloped countries is the problem of lack of capital formation whose main
causes are lack of saving and investment. Therefore, central bank can play an
important role by promoting capital formation through mobilizing saving s and
encouraging investment.