7 essential functions of a central bank of India

M. H. Do-Kock has explained the following seven functions of a central bank in his book “Central Banking” which economists have generally accepted.

1. Monopoly of note-issue.

2. Banker, agent and adviser to the government.

3. Custodian of cash reserves of commercial banks.

4. Custodian of nation’s reserves of international currencies.

5. Lender of the last resort

6. Clearing house function

7. Credit control

Besides the aforesaid seven functions there are some other functions also, namely:

(i) Collection of data.

(ii) Role of central bank in developing countries.

(iii) Central bank and industrial and agricultural development.

(iv) International financial institutions.

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.

2. Banker, Agent & Adviser to the Government:

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.

3. Custodian of Cash Reserves of Commercial Bank:

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 centralisation of cash reserve and facilitates working of credit control. These funds are of great significance during the time of emergency.

4. Custodian of Nation’s Reserves of International Currencies:

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.

5. Lender of the Last Resort:

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.

6. Clearing House Function:

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.

7. Credit Control:

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. These methods have been discussed in detail in the next question.