In the developing countries, the central bank has to play a much wider role. Besides performing the traditional functions, the central bank has to undertake responsibility of economic growth with stability in these economies. Moreover, since the developing countries do not have well- organised money and capital markets, the central bank has a crucial function to develop the banking and financial system of the country. The central bank performs the following developmental and promotional functions in the developing countries.
1. Traditional Functions:
The central banks in the developing countries perform both traditional and non-traditional functions. The traditional functions of the central bank are : having the monopoly of note-issue; acting as banker to the government; serving as bankers’ bank; functioning as the lender of the last resort; controlling and regulating the credit; and maintaining the external stability.
2. Economic Growth:
The central banks in the developing countries should aim at promoting the process of economic growth. Economic growth requires sufficient financial resources. The central bank can ensure adequate monetary expansion in the country. Moreover, as a banker to the government, the central bank can provide funds for initiating investment in the public sector.
3. Internal Stability:
Along with the objective of economic growth, the central bank should also attempt to maintain internal price stability. The developing countries are susceptible to inflationary pressures mainly due to supply -in elasticities in the short period. The central bank should adopt such a monetary policy that can control inflationary tendencies and ensure price stability.
4. Development of Banking System:
The developing and underdeveloped countries do not have well-developed banking system. In such an economy, the central bank should not only take measures to develop an integrated commercial banking system, but also should not hesitate undertaking directly the commercial banking functions.
5. Branch Expansion:
In developing countries, the commercial banks generally concentrate their branches in the urban areas. In order to extend credit facilities to the agricultural sector, the central bank should prepare programme for branch expansion in the rural areas.
6. Development of Financial Institutions:
Development of the leading sectors of the economy such as agriculture, industry, foreign trade, etc. requires long-term finances. For this, the specialised financial institutions should be established which provide term-loans to these sectors.
7. Development of Banking Habits:
Through its various credit control instruments (i.e., bank rate, variable cash-reserve ratio, etc.) and by providing discounting facilities to the commercial banks, the central bank exercises full control over the activities of commercial banks. This creates public confidence in the banking system and helps in the development of banking habits of the people.
8. Training Facilities:
A major difficulty in developing the banking system in developing countries is the lack of trained staff. The central bank can provide training facilities to meet the personnel requirements of the banks.
9. Proper Interest Rate Structure:
The central bank can help in establishing a suitable interest rate structure to influence the direction of investment in the country. In underdeveloped countries, a policy of low interest rate is necessary for encouraging investment and promoting development activities. Again, by adopting different interest rates, the central bank can increase productive investment and discourage unproductive investment.
10. Other Promotional Roles:
The central bank can provide a number of other promotional facilities. For example, (a) it can adopt policies to provide help to the various priority sectors, such as agriculture;, cooperative sector, small scale sector, export sector, etc. (b) it can provide guidelines to be followed by the planners about some definite patterns of economic and investment policies; (c) it can publish information regarding the state of the economy and promote research in money and banking.
In short, the central bank has to play not only regulatory, but also developmental role in the developing countries. In the words of Planning Commission of India, the central bank has to take “a direct and active role (a) in creating or helping to create the machinery needed for financing development activities all over the country, and (b) in ensuring that the finance available flows in the directions intended.”