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central bank

12. Apr 2018
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central bank

  1. CENTRAL BANKS AND ITS FUNCTIONS BY : NEERAJ GARWAL
  2. Central Bank Definition: “A Central Bank is the bank in any country to which has been entrusted the duty of regulating the volume of currency and credit in that country” -Bank of International Settlement. According to Kent : “Central Bank may be defined as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare.”  Bank of England was the world’s first effective central bank that was established in 1694. As per the resolution passed in Brussels Financial Conference, 1920, all the countries should establish a central bank for interest of world cooperation. Thus, since 1920, central banks are formed in almost every country of the world. In India, RBI operates as a central bank and was formed in 1935.
  3. Functions of Central Bank Central Bank Traditional Functions Primary Functions Non-Traditional Functions Secondary Functions
  4. Functions of Central Bank Traditional Functions : Which are generally performed by central banks all over the world, are classified into two groups; ◦ Primary Functions: including issue of notes, regulation of financial system, and conduct of monetary policy ◦ Secondary Functions: including management of public debt, management of foreign exchange, advising the government on policy matters, and maintaining close relationships with the international financial institutions Non-Traditional Functions: these functions are performed by the Central Bank include development of financial frame work, provision of training facilities to bankers, and provision of credit to priority sectors.
  5. FUNCTIONS OF CENTRAL BANK The main functions of a central bank are common all over the world. But the scope and content of policy objectives may vary from country to country and from period to period depending on the economic situations of the respective country. Generally all the central banks aim at achieving economic stability along with a high growth rate and a favourable external payment position through proper monetary management. The common functions of central banks are as below: 1. Regulator of currency 2. Banker, Agent and Adviser to the Government 3. Custodian of cash Reserves of commercial banks 4. Custodian and Management of Foreign Exchange reserves 5. Lender of the last resort 6. Clearing house Function 7. Controller of credit
  6. 1. Regulator of currency The issue of paper money is the most important function of a central bank. The central bank is the authority to issue currency for circulation, which is a legal tender money. The issue department of the central bank has the responsibility to issue notes and coins to the commercial banks. The central bank regulates the credit and currency according to the economic situation of the country. In the methods of note issue, the central bank is required to keep a certain amount or a fixed proportion of gold and foreign securities against the total notes issued. The Reserve Bank of India is required to keep Rs.115 crore in gold and Rs.85 crore in foreign securities, but there is no limit to the issue of notes. Having the monopoly of note issue, central bank gains advantages as Ensuring uniformity of the notes issued and a proper control over the supply of money can be exercised. Bring stability in the monetary system and creates confidence among the public. Government is able to earn profits from printing currencies
  7. 2. Banker, Agent and Adviser to the Government The central bank of the country acts as the banker, fiscal agent and advisor to the government. As a banker, it keeps the deposits of the central and state governments and makes payments on behalf of governments. It buys and sells foreign currencies on behalf of the government. It keeps the stock of gold of the country. As a fiscal agent, the bank makes short-term loans to the government for a period not exceeding 90 days. It floats loans and advances to the State governments and local bodies. It manages the entire public debt on behalf of the government. As an adviser, the bank gives useful advice to the governments on important monetary and economic problems like devaluation, foreign exchange policy and budgetary policy.
  8. 3.Custodian of cash Reserves of commercial banks Commercial banks are required to keep a certain percentage of cash reserves with the central bank. On the basis of these reserves, the central bank transfers funds from one bank to another to facilitate the clearing of cheques . 4.Custodian and Management of Foreign Exchange reserves The central bank keeps and manages the foreign exchange reserves of the country. It fixes the exchange rate of the domestic currency in terms of foreign currencies. If there are any fluctuations in the foreign exchange rates, it may have to buy and sell foreign currencies in order to minimize the instability of exchange rates.
  9. 5.Lender of the last resort By giving accommodation in the form of re-discounts and collateral advances to commercial banks, bill brokers and their financial institutions, the central bank acts as the lender of the last resort. The central bank lends to such institutions in order to help them when they are faced with difficult situations so as to save the financial structure of country from collapse. 6.Clearing House Function The central bank acts as a 'clearing house' for other banks and mutual obligations are settled through the clearing system. Since it holds cash reserves of commercial banks, it is easier for the central bank to act as a 'clearing house'.
  10. 7.Controller of credit The most important function of the central bank is to control the credit creation power of commercial banks in order to control inflationary and deflationary pressures within the economy. Controlling credit in the economy is amongst the most important functions of the Reserve Bank of India. The basic and important needs of credit control in the economy are-  To encourage the overall growth of the "priority sector" i.e. those sectors of the economy which is recognized by the government as "prioritized" depending upon their economic condition or government interest. These sectors broadly totals to around 15 in number.  To keep a check over the channelization of credit so that credit is not delivered for undesirable purposes.  To achieve the objective of controlling inflation as well as deflation.  To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.  To develop the economy.  For thispurpose,the centralbank adopts 1. Quantitative methods 2. Qualitative (selective) methods.
  11. Other Functions: Besides the above functions, the central bank performs many additional functions. It has to study all problems relating the I ) credit, ii) fluctuations in price level iii) fluctuations in foreign exchange value. It has to collect monetary and financial statistics, conduct research and provide information. It has to look after the matters relating to IMF and the World Bank. All together, the central bank is the financial and monetary guardian of the nation.
  12. 1.QUANTIATIVE METHOD : These help the quantity of credit created and the money in circulation the following method are used : The quantitative measures of credit control are as follows: 1. BankRate Policy The bank rate is the Official interest rate at which RBI rediscounts the approved bills held by commercial banks. For controlling the credit, inflation and money supply, RBI will increase the Bank Rate. 2. Open Market Operations These refer to direct sales and purchase of securities and bills in the open market by Reserve bank of India. The aim is to control volume of credit. 3. Varying Interest Rates: Commercial banks vary interest rates depending on the credit requirements of the society and as per directions of RBI
  13. 4. VaryingReserve Requirements: The central bank changes the rate of cash reserve and it has direct effect on money supply .  Cash ReserveRatio CRR refers to that portion of total deposits in commercial Bank which it has to keep with RBI as cash reserves. an increase in CRR will decrease the capacity of banks to lend money thereby decrease the money supply and vice versa .  StatutoryLiquidityRatio refers to that portion of deposits with the banks which it has to keep with itself as liquid assets(Gold, approved govt. securities etc.) If RBI wishes to control credit and discourage credit it would increase CRR & SLR. 5. VaryingRepo Rate and Reverse -Repo rate: Reporate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.
  14. II. Qualitative or Selective Method of Credit Control: The qualitative or the selective methods are directed towards the diversion of credit into particular uses or channels in the economy. Their objective is mainly to control and regulate the flow of credit into particular industries or businesses. The following are the important methods of credit control under selective method: 1. Rationing of Credit. 2. Direct Action. 3. Moral Suasion. 4. Method of Publicity. 5. Regulation of Consumer’s Credit. 6. Regulating the Marginal Requirements on Security Loans.
  15. 1. Rationing of Credit: Under this method the credit is rationed by limiting the amount available to each applicant. The Central Bank puts restrictions on demands for accommodations made upon it during times of monetary stringency. In this the Central Bank discourages the granting of loans to stock exchanges by refusing to re-discount the papers of the bank which have extended liberal loans to the speculators. This is an important method of credit control and this policy has been adopted by a number of countries like Russia and Germany.
  16. 2. Direct Action: Under this method if the Commercial Banks do not follow the policy of the Central Bank, then the Central Bank has the only recourse to direct action. This method can be used to enforce both quantitatively and qualitatively credit controls by the Central Banks. This method is not used in isolation; it is used as a supplement to other methods of credit control. Direct action may take the form either of a refusal on the part of the Central Bank to re-discount for banks whose credit policy is regarded as being inconsistent with the maintenance of sound credit conditions. Even then the Commercial Banks do not fall in line, the Central Bank has the constitutional power to order for their closure. This method can be successful only when the Central Bank is powerful enough and has cordial relations with the Commercial Banks. Mostly such circumstances are rare when the Central Bank is forced to resist to such measures.
  17. 3. Moral Suasion: This method is frequently adopted by the Central Bank to exercise control over the Commercial Banks. Under this method Central Bank gives advice, then request and persuasion to the Commercial Banks to co-operate with the Central Bank is implementing its credit policies. If the Commercial Banks do not follow or do not abide by the advice or request of the Central Bank no gross action is taken against them. The Central Bank merely was its moral influence and pressure with the Commercial Banks to prevail upon them to accept and follow the policies.
  18. 4. Method of Publicity : In modern times, Central Bank in order to make their policies successful, take the course of the medium of publicity. A policy can be effectively successful only when an effective public opinion is created in its favour. Its officials through news-papers, journals, conferences and seminar’s present a correct picture of the economic conditions of the country before the public and give a prospective economic policies. In developed countries Commercial Banks automatically change their credit creation policy. But in developing countries Commercial Banks being lured by regional gains. Even the Reserve Bank of India follows this policy.
  19. 5. Regulation of Consumer’s Credit: Under this method consumers are given credit in a little quantity and this period is fixed for 18 months; consequently credit creation expanded within the limit. This method was originally adopted by the U.S.A. as a protective and defensive measure, there after it has been used and adopted by various other countries. 6. Changes in the Marginal Requirements on Security Loans: This system is mostly followed in U.S.A. Under this system, the Board of Governors of the Federal Reserve System has been given the power to prescribe margin requirements for the purpose of preventing an excessive use of credit for stock exchange speculation. This system is specially intended to help the Central Bank in controlling the volume of credit used for speculation in securities under the Securities Exchange Act, 1934
  20. Objectives of credit control : Credit control policy is just an arm of economic policy which comes under the purview of Reserve Bank of India, hence, its main objective being the attainment of high growth rate while maintaining the reasonable stability of the internal purchasing power of money. The broad objectives of credit control policy in India have been- Ensure an adequate level of liquidity enough to attain high economic growth rate along with maximum utilisation of resource but without generating high inflationary pressure. Attain stability in the exchange rate and money market of the country. Meeting the financial requirement during a slump in the economy and in the normal times as well. Control business cycle and meet business needs.
  21. DIFFERENCE BETWEEN CENTRAL BANK AND COMMERCIAL BANK CENTRAL BANK COMMERCIAL BANK
  22. Reserve Bank Of India Establishment The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. Preamble The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth."
  23. CentralBoard: The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act. Appointed/nominated for a period of four years Constitution: Official Directors Full-time : Governor and not more than four Deputy Governors Present Governor of RBI is Dr. Urjit R. Patel Non-Official Directors Nominated by Government: ten Directors from various fields and two government Official Others: four Directors - one each from four local boards Functions: General superintendenceand directionof the Bank'saffairs Local Boards: One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi Membership: consist of five members each appointed by the Central Government for a term of four years Functions: To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.
  24. Offices: Has 20 regional offices, most of themin state capitals and 11 Sub- offices. Training Establishments: Has five training establishments Two, namely, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT) For details on training establishments, please check their websites links for which are available in Other Links. Subsidiaries Fully owned: 1. Deposit Insurance and Credit Guarantee Corporation of India(DICGC), 2. Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL), 3. National HousingBank(NHB)
  25. Names and addresses of the Central Board of Directors of the Reserve Bank of India as on 01.01.2018 1. Dr. Urjit R. Patel, Governor 7. Shri Bharat Narotam Doshi 2. Shri N. S. Vishwanathan, Deputy Governor 8. Shri Sudhir Mankad 3. Dr. Viral V. Acharya, Deputy Governor 9. Dr. Ashok Gulati 4. Shri B.P. Kanungo, Deputy Governor 10. Shri Manish Sabharwal 5. Dr. Nachiket M. Mor 11. Shri Subhash Chandra Garg 6. Shri Natarajan Chandrasekaran 12. Shri Rajiv Kumar
  26. BIBLIOGRAPHY 1. www.google.co.in=images+of+central+bank&chips=q:images+ and+its+functions 2. www.wikipedia.com 3. www.gktoady.com 4. https://www.rbi.org.in 5. https://www.google.co.in 6. Macroeconomics : BY T.R.JAIN & V.K.OHRI 7. Macroeconomics : BY SANDEEP GARG 8. All in One : Akansha Sharma
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