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Central Banking Functions And Credit Control

 Central Banking: Functions and Credit Control


A Central Bank is defined in terms of its functions and as per Vera Smith, The primary definition of Central Banking is a banking system in which a single bank has either complete control or a residuary monopoly of note issue.

As per Sayers, the Central Bank Is the organ of Government that undertakes the major financial operations of the government and by its conduct of these operations and by other means, influences the behaviour of financial institutions so as to support the economic policy of the government.

The broadest definition has been given by Economist De Kock and as per him a Central Bank is A Bank which constitutes the apex of the monetary and banking structure of its country and which performs as best as it can in the national economic interest, the following functions:

  • The regulation of currency in accordance with the requirements of business and the general public for which purpose it is granted either the sole right of note issue or at least a partial monopoly there of.

  • The performance of general banking and agency of the state.

  • The custody of the Cash Reserves of the Commercial Banks.

  • The granting of accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and dealers or other financial institutions and the general acceptance of the responsibility of lender of the last resort.

  • The custody and management of the nation’s reserves of international currency.

  • The settlement of clearance balances between the banks.

  • The control of credit in accordance with the needs of business and with a view to carrying out the broad monetary policy adopted by the state.

Functions of A Central Bank

Majority of Economists has accepted the following functions to be performed by a Central Bank and it is been framed by the economist De Kock.

  1. Regulator of Currency

    • The central bank is the issue bank and it has a monopoly note issue. Notes issued by it flows as legal tender money.

    • The issue department issues notes and coins to commercial banks and coins are manufactured in the government mint but are placed into flow through the central bank.

    • Various Central banks had been adopting varied modes of note issue in various nations. The central bank is obligatory by statute to hold a specified volume of gold and foreign securities versus the notes issue.

    • In few nations, the quantity of gold and foreign securities abides a fixed proportion amidst 30 to 45 percent of the total notes issued.

    • In few other nations, a minimum specified quantity of gold and foreign currencies is obligatory to be kept against note issue by the Central Bank.
  1. Banker, Fiscal Agent and Adviser to the Administration

    • In general, Central Bank performs as bankers, fiscal agents and advisers to their corresponding law of administration. As a banker to the law of administration, the central bank holds the deposit investment of the central and state governments and makes spending on behalf of the law of administration.

    • And hence, however, it denies paying interest on government deposit investments.

    • It purchases and sells foreign currencies on behalf of the law of administration.

    • It holds the inventories of gold of the law of administration and thus it is the guardian of administration’s finance and affluence.

    • As a fiscal agent, the central bank makes short term loans to law of administration for a term not more than 90 days.

    • As an adviser, the central bank advises government on fiscal and money matters as protecting, devaluation and revaluation, inflation or deflation of the currency, balance of payments, deficit financing etc.
  1. Guarding of Cash Reserves of Commercial Banks

    • Commercial banks are necessitated by law to keep reserves equal to a certain percentage of both time and demand deposits liabilities with the central bank.

    • It is on the origin of these reserves that the central bank shifts funds from one bank to another to make possible the clearing of cheques.
    • Thus the central bank performs as the guardian of the cash reserves of commercial banks and facilitates in making feasible their transactions.

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