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Central Bank – Meaning and Functions

Meaning: In every country, there is one apex institution which acts as the
leader of the money market. In supervises, regulates and controls are
activities of commercial banks and other financial institutions. Such an
institution is called as the central bank of the country. In India, RBI acts as a
central Bank of the country.

Functions: De Kock has mentioned seven important functions of a central

Bank.

They are:
1. Bank of Issue: It is the primary and very important function of a central
Bank. Now a days central Bank in every country has been given the sole
right of note-issue. In ancient times issue of currency metallic coins used
to be exclusive privilege of the ruler as a matter of fact, circulation of
currency determined the title of a particular ruler or king over the
territory. The coins used to serve as the seal of the king with the issue in
circulation of paper currency notes, this right came to be concerned with
the state. Paper notes were put in circulation in place of metallic coins
and were declared unlimited legal tender, i.e. paper notes acquired legal
authority to be accepted as means of payments in all the transactions.
Gradually, however it was realised that the concentration of the right of
note issue with the state renders the currency unstable. The state could
always resort to over-issue of currency notes for meeting its financial
needs.
Consequently, the function of note issue came to be performed by the
banks. Presently, in almost all the countries in the world, the right of
note-issue is the monopoly of the central bank.

2. Banker, Agent and Financial Advisor to the Govt.: As banker to the

govt. the central Bank makes and receives payments on behalf of the
govt. It helps the govt. With short-term loans and advances in times of
difficulties.
As govt. agent, the Central Bank also acts as advisor to the govt. specially
on monetary, banking and financial matters.

3. Banker to the Banks: The Central Bank bears the same relationship to
the commercial banks as the commercial banks maintain with the general
public. The central banks acts as the bankers’ bank. The commercial
banks deposit their surplus cash reserves with the Central Bank and
similarly borrow from the central bank when the need arises. In the
earlier times smaller commercial banks used to look upon their ‘big
brothers’ for this type of services.
Gradually, as the relatively big banks began to act as banks of issue and
govt’s bankers, the commercial banks began to look upon the as their
 bankers. The cash reserves of the commercial banks came to be
centralized with the central bank.

4. Custodian of Foreign Exchange Balances of the country: The

central Bank performs two major functions in the field of foreign
exchange:
(a) It has become the custodian of the country’s reserves of
international currencies, and
(b) The maintains stability of the exchange rate of the currency.
All the foreign exchange transactions of a country are routed
through the central bank of the country. All the expenses in foreign
currency whenever required are incurred though the agency of this
bank. Similarly, all foreign exchange earnings have to be deposited
with the central bank.

5. Lender of the Last Resort: As commercial banks lend to the

individuals, the central bank lends to the commercial banks in times of
emergencies. Thus the central bank assumes the responsibility of
meeting directly or indirectly all reasonable demands for funds by
commercial banks in times of difficulties and crisis. A commercial bank
can borrow from the central bank against eligible securities.

6. Bank of central Clearance: Economists lie shaw, willis and Jauncey

consider the function of a clearing house as the most important function
of the central bank. Because Central bank keeps the cash balance of all
commercial banks, it is easier for member banks to adjust their claims
against each other in the books of the central bank. This system of
clearing agreements facilitates transfer of funds quickly safely and at low
cost.