Central bank: A central bank is an apex institution of a country that controls and regulates the monetary and financial systems of a country. In India Reserve Bank of India (RBI) is the central bank.
Main functions of a central bank are:
i) Issue of Currency - The central bank has monopoly of issuing currency in the country. Currency issued by it, is its monetary liability so it has to keep a reserve in the form of gold and foreign securities. It promotes efficiency in the financial system. Firstly, because this leads to uniformity in the issue of currency. Secondly, because it gives Central Bank a direct control over money supply.
ii) Bankers to Government- Central bank acts as the bank of central and state governments. It carries out all banking business of the govt. The govt. keeps its cash balances on current a/c with the central bank. It gives loans to central government for short period and manages the public debt of the country. It also transfers government funds and buys and sells securities, treasury bills etc. on behalf of the government.
iii) Bankers Bank & Supervisor- As the banker to banks the central bank holds a part of cash reserve of banks, lends them short-term funds and provides them with centralized clearing and remittance facilities.
The central bank supervises, regulates and controls the commercial banks. The regulation of these banks may be related to their licensing, branch expansion, liquidity of assets, management, merging of banks etc. The control is exercised by periodic inspection of banks and the returns filed by them.
iv) Controller of Money Supply- The central bank of the country tries to control the availability of credit in the market with its many tools like CRR, SLR, bank rate, open market operation etc which are also called the instruments of Monetary policy. Central bank regulates the money supply and credit in the best interest of the country.
v) Lender of Last Resort- It helps the commercial banks in times of financial difficulties. Scheduled banks can take the loans by re discounting first class bills or short term approved securities, whenever they do not get funds from any other sources.
