Role of the Central Bank as

Regulatory Authority of Financial

Markets and Institutions

PRESENTED BY:
B.G.BHATTACHARYA
 History of Central Bank

A central bank is the term used to describe the

authority responsible for policies that affect a
countrys supply of money and credit.
More specifically, a central bank uses its tools of
monetary policyopen market operations,
discount window lending, changes in reserve
requirementsto affect short-term interest rates
and the monetary base (currency held by the public
plus bank reserves) and to achieve important
policy goals.
 Contd.

As the first public bank to "offer accounts not

directly convertible to coin", the Bank of
Amsterdam established in 1609 is considered to be
the precursor to modern central banks.
The central bank of Sweden was founded in
Stockholm from the remains of the failed bank
Stockholms Banco in 1664 and answered to the
parliament ("Riksdag of the Estates") thus making
it the oldest central bank still operating today.
 Contd.

Although central banks today are generally

associated with fiat money, the 19th and early 20th
centuries central banks in most of Europe and
Japan developed under the international gold
standard, elsewhere free banking or currency
boards were more usual at this time. Problems
with collapses of banks during downturns,
however, was leading to wider support for central
banks in those nations which did not as yet possess
them, most notably in Australia.
 Cont.

The US Federal Reserve was created by the U.S.

Congress through the passing of The Federal
Reserve Act in the Senate and its signing by
President Woodrow Wilson on the same day,
December 23, 1913. Australia established its first
central bank in 1920, Colombia in 1923, Mexico
and Chile in 1925 and Canada and New Zealand in
the aftermath of the Great Depression in 1934.
 Cont.

The People's Bank of China evolved its role as a

central bank starting in about 1979 with the
introduction of market reforms, which accelerated in
1989 when the country adopted a generally capitalist
approach to its export economy.
The most recent bank model, was introduced
together with the euro, involves coordination of the
European national banks, which continue to manage
their respective economies separately in all respects
other than currency exchange and base interest
rates.
 Contd.

Nepal Rastra Bank, the Central Bank of Nepal, was

established in 1956 under the Nepal Rastra Bank
Act 1955, to discharge the central banking
responsibilities including guiding the development
of the embryonic domestic financial sector.
Since inception, there has been a significant
growth in both the number and the activities of the
domestic financial institutions.
 Contd.

Nepal Bank Ltd. remained the only financial

institution of the country until the foundation of
Nepal Rastra Bank is 1956 A.D.
Due to the absence of the central bank, Nepal
Bank has to play the role of central bank and
operate the function of central bank..
Nepal Rastra Bank makes various guidelines for
the banking sector of the country.
 Objectives of NRB

To achieve price and balance of payments stability,

manage liquidity and ensure financial stability,
develop a sound payments system and promote
financial services.
To formulate necessary monetary and foreign
exchange policies to maintain the stability in price
and consolidate the balance of payments for
sustainable development of the economy of Nepal
 Contd.

To develop a secure, healthy and efficient system of

payments;
To make appropriate supervision of the banking and
financial system in order to maintain its stability and
foster its healthy development; and
To further enhance the public confidence in Nepal's
entire banking and financial system.
To promote entire banking and financial system of
the kingdom of Nepal system.
 Central Bank

A central bank is a public institution that manages

a state's currency, money supply, and interest
rates.
Central banks also usually oversee the commercial
banking system of their respective countries.
In contrast to a commercial bank, a central bank
possesses a monopoly on increasing the nation's
monetary base, and usually also prints the national
currency, which usually serves as the nation's legal
tender.
 Central Bank Cont

Examples include the:

Nepal Rastra Bank (NRB),
Reserve Bank of India (RBI),
European Central Bank (ECB),
Bank of England,
Bank of Japan,
Federal Reserve of the United States,
People's Bank of China etc.
 NEPAL RASTRA BANK

NRB, the central bank of Nepal, established in 1956 under the

Nepal Rastra Bank Act 1955 is the monetary, regulatory and
supervisory authority of banks and financial institutions.
The new Nepal Rastra Bank Act 2002 which replaces the
erstwhile Act has ensured operational autonomy and
independence to the Bank.
Key objectives of the Bank are to achieve price and balance of
payments stability, manage liquidity and ensure financial
stability, develop a sound payments system, and promote
financial services.
The Board of Directors, chaired by the Governor, is the apex
body of policy making and the Governor also discharges his
duty as the chief executive of the Bank.
 NEPAL RASTRA BANK

Vision
To become A modern, dynamic, credible and
effective Central Bank

Mission
To maintain macro-economic stability through
sound and effective monetary, foreign exchange
and financial sector policies.
 NEPAL RASTRA BANK
NRB Governors over the years
S.N. Name of Governor
1. Mr. Himalaya Shumsher J.B. Rana
2. Mr. Laxmi Nath Gautam
3. Mr. Pradyuma Lal Rajbhandari
4. Dr. Bhekh Bahadur Thapa
5. Dr. Yadav Prasad Pant
6. Mr. Kul Shekhar Sharma
7. Mr. Kalyana Bikram Adhikary
8. Mr. Ganesh Bahadur Thapa
9. Mr. Hari Shankar Tripathi
10. Mr. Satyendra Pyara Shrestha
11. Dr. Tilak Bahadur Rawal
12. Mr. Deependra Purush Dhakal
13. Mr. Bijaya Nath Bhattarai
14. Mr. Deependra Bahadur Kshetry
15. Dr. Yuba Raj Khatiwada
Term of office
April 26, 1956 February 7, 1961
February 8, l961 June 17, l965
June l8, l965 August 13, l966
August 14, l966 July 26, l967
April 24, l968 April 28, l973
April 29, l973 December 12, l978
June 13, l979 December 8, l984
March 25, l985 May 22, l990
August 10, l990 January 17, l995
January l8, l995 January l7, 2000
January l8, 2000 - January l7, 2005
August 29, 2000 April 27, 2001
January 31, 2005 January 30, 2010
January 15, 2009 July 26, 2009
March 22, 2010 -
 NEPAL RASTRA BANK
Board of Directors
As per section 14 of Nepal Rastra Bank Act, 2002, the
Board of Nepal Rastra Bank (NRB) comprises of seven
members: four ex officio members - the Governor (who is
the Chairman), the Secretary, Ministry of Finance, two
Deputy Governors, and three other Directors, who are
appointed from amongst the persons renowned in the field
of Economics, Monetary, Banking, Finance and
Commercial Laws.
The Governor, Deputy Governors and other Directors are
appointed by Government of Nepal, Council of Ministers
for term of five years. Government may, reappoint the
retiring Governor for another one term and the retiring
other Directors for any term, if it is deemed necessary.
 Functions of a Central Bank

1. Bank of Note Issue:

The central bank has the sole monopoly of note issue in almost
every country. The currency notes printed and issued by the
central bank become unlimited legal tender throughout the
country.
The main advantages of giving the monopoly right of note issue
to are :
(i) Brings uniformity in the monetary system of note issue and
note circulation.
(ii) Increases public confidence in the monetary system.
(iii) Enables the central bank to exercise control over the
creation of credit by the commercial banks.
Functions of a central bank

2. Banker, Agent and Adviser to the Government:

The central bank functions as a banker, agent and financial
adviser to the government,
a) As banker to government, the central bank maintains the
accounts of the central as well as state government, receives
deposits from it, makes short-term advances and collects
cheques and drafts deposited in the government account.
b) As an Agent to the government, the central bank collects
taxes and raises loans from the public and thus manages
public debt.
c) As a financial adviser to the lent, the central bank gives
advise to the government on economic, monetary, financial
and fiscal matters.
 Functions of a central bank

3. Bankers' Bank:
The central bank acts as the bankers' bank in three
capacities:
(a) custodian of the cash preserves of the commercial
banks;
(b) as the lender of the last resort; and
(c) as clearing agent.

In this way, the central bank acts as a friend,

philosopher and guide to the commercial banks
 Functions of a central bank

4. Lender of Last Resort:

In case if the commercial banks are not able to meet their
financial requirements from other sources, they can, as
a last resort, approach the central bank for financial
accommodation.
- It increases the elasticity and liquidity of the whole
credit structure of the economy.
- It provides financial help to the commercial banks in
times of emergency.
- It enables the central bank to exercise its control over
banking system of the country.
 Functions of a central bank

5) Clearing Agent :
The function of clearing house in the central bank has
the following advantages:
(i) It economies the use of cash by banks while settling
their claims and counter-claims.
(ii) It reduces the withdrawals of cash and these enable
the commercial banks to create credit on a large scale.
(iii) It keeps the central bank fully informed about the
liquidity position of the commercial banks.
 Functions of a central bank

6. Credit control:
- The significance of the function has increased so much
that for property understanding. The central bank has
acquired the rights and powers of controlling the entire
banking.

- Central bank can adopt various quantitative and

qualitative methods for credit control such bank rate,
open market operation, changes in reserve ratio selective
controls, moral situation etc.
 Functions of a central bank
7. Collection of Data:
Central banks collects statistical data regularly
relating to economic aspects of money, credit,
foreign exchange, banking, economic growth etc.
 Role of Central Bank

Control of the money supply

Stabilizing the money and capital markets
Lender of Last resort
Maintaining and improving the payments
mechanism
Maintaining a sound banking and financial
system
Carrying out monetary policy
Providing information to the public
 Contd..

Control of the money supply:

Central bank plays several important role in
a modern economy. The most important role
is control of the money supply.
To control the inflation

To change the economic activity

To influence the growth rate of economy as

a whole
 Contd..
Stabilizing the money and capital markets:
Another important role of central bank is stabilizing
the money and capital markets. If the financial
markets are unruly, with more fluctuation in
interest rates and securities prices or financial
institutions are prone to frequent collapse, public
confidence in the financial system might be lost.
 Contd.
Cont

The flow of funds would dry up, resulting

in a drastic slowing in the rate of
economic growth and a rise in
unemployment.
Central bank play a vital role in fostering
the mature development of financial
markets and in ensuring a stable flow of
funds through those markets
 Contd

Lender of Last resort:

Sometime, financial institutions may face the
problems of funds. When alternative sources
of funds dried up, the central bank provides
the funds to the financial institutions as per
their needs at the time of financial crisis to
solve the problem.
 Contd

Maintaining and improving the

payments mechanism:
This involves clearing cheques

Providing adequate currency

Wiring funds

Preserving confidence in the value of

monetary units
 Contd

Maintaining a sound banking and

financial system:
By serving as a lender of last resort
By providing reserves to depositary
institutions
 Contd

Carrying out monetary policy:

Various tools are used to carry out the
monetary policy:
Deposit reserve requirement
Discount rates
Open market operation etc
 Contd

Providing information to the public:

Information related current economic and
financial developments and changes in
policies etc.
Daily, weekly, monthly, quarterly etc.
 Conclusion
A central bank is a public institution that manages a state's
currency, money supply, and interest rates.
NRB-the central bank of Nepal-established in 1956 -Nepal Rastra
Bank Act 1955
It is the monetary, regulatory and supervisory authority of banks
and financial institutions.
The new NEPAL RASTRA BANK ACT 2002 replaces the
erstwhile Act has ensured operational autonomy and
independence to the Bank.
Key objectives of the Bank are to achieve price and balance of
payments stability, manage liquidity and ensure financial
stability, develop a sound payments system and promote
financial services.
 Contd..

The Board of Directors, chaired by the Governor, is the

apex body of policy making and the Governor also
discharges his duty as the chief executive of the Bank.
Central bank plays the role of :
Banker, Agent and Adviser to the Government,
Bankers' Bank,
Lender of Last Resort,
Clearing Agent
Credit controller
Collection of Data
Bank of Note Issue
 Contd..

The major objectives of the central bank are to

achieve price and balance of payments stability,
manage liquidity, ensure financial stability, develop a
sound payments system, promote financial services,
formulate necessary monetary and foreign exchange
policies, make appropriate supervision of the
banking and financial system in order to maintain its
stability and foster its healthy development, enhance
the public confidence in banking and financial
system and promote entire banking and financial
system of the nation.