Monday, 1 August 2011

Discuss the main powers and functions of the central bank or the state bank

The powers and functions of the central bank differ from country to country however following are the important functions of the central bank.


At the present time, the central bank has the monopoly of note issue through out the world. No other bank can issue the notes.State bank issues the paper currency. There are two principles of note issue :
1. Currency Principle.
2. Proportional Reserve System.


As the government bank it performs the following services :

1. Accounts Holder :-

It keep government accounts. It receives deposits and makes payment on behalf of the government.

2. Lender to the Government :-

The central bank grants loans to the government. It also makes investment in government bills and securities.

3. Public Debt Management :-

The central bank manages public debt and also handles financial business.

4. Financial Advisor :-

The central bank acts as an advisor to the government in the matters of monetary.

5. Banker's Bank :-

The central bank acts as a banker to the commercial banks, in the following ways :

6. Maintenance of Cash Reserve :-

The commercial banks keep a fixed portion of their total deposits as a reserve with the central bank.

7. Lender of Last Resort :-

At the time of banking crises, the commercial banks can get loan and re-discount of their bills of exchange.

8. Remittance Facility :-

The central bank also provides remittance facilities to the commercial banks.

9. Clearing House :-

The central bank manages and supervises the clearing house to facilitate the clearing of cheques between banks.

10. Foreign Exchange Policy :-

In the field of foreign exchange policy there are three important functions.

11. Custodian of Exchange Reserves :-

The central bank is also a custodian of foreign exchange and gold reserves.

12. Exchange Control :-

The central bank manages foreign exchange transactions and enforces exchange control regulations. The allocation of foreign exchange expenditure is made by the government through the central bank.

13. Exchange Rate Stability :-

The central bank is responsible for maintaining of stable foreign exchange rate.

14. Controls Credit :-

It is also the responsibility of the central bank to regulate the volume of credit and its direction according to the economic conditions of the country.

15. Price Stability :-

It is also the basic function of the central bank that it should frame the monetary policy in such a manner that prices inside the country should be stable.

16. Falling Prices Case :-

In case of falling prices the central bank adopts the inflationary policy and increases the supply of money and credit.

17. Case of Rising Prices :-

In case of rising prices central bank adopts the deflationary policy and decreases the total quantity of money and credit. So inflation can be checked.

18. Growth and Control of Banks :-

It is the duty of the central bank to promote the growth of the banking system on sound footing. The central bank also controls the commercial banks.

19. Export Finance Scheme :-

Under the state bank export finance scheme the commercial banks are providing finance to the exporters at the concessional rate. This scheme has encouraged the exports.


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