Central Bank may be defined as an institution charged with the responsibility of managing the expansion and contraction of the volume of money supply for general Economic Welfare. The Central Bank is the apex institution in the banking and financial structure of the country.
Functions of Central Bank Central Bank plays a leading role in organizing, running, supervising, regulating and developing the banking and financial structure of the country.
Monopoly of Note Issue: The Central Bank enjoys the exclusive power of note issue. In India the RBI issues all notes except Re 1 notes and coins. Re 1 notes are issued by the Government of India under the guidance of RBI. The currency notes issued by the Central Bank are declared unlimited legal tender throughout the country. The Central Bank has to keep reserve of Gold, Silver and foreign securities for issuing notes.
Banker, agent, advisor to the Government: The Banking A/c of the government both central and state are maintained by the Central Bank as the commercial bank does for its customers. As a banker and to the government it helps the government in short term loans and advances for temporary requirements and floats public loans for the government.
Banker’s Bank: All commercial banks keep part of their cash balances as deposits with the Central Bank of the country. This is either because of convention or legal compulsion. The commercial banks regularly draw currency during the busy season and paying in surplus during the slack season. Part of these balances are meant for clearing purposes i.e.; all commercial banks keep deposit account with the Central Bank. The deposit balances of the Central Bank is considered as cash reserves for general purpose. Under the Banking Regulations Act of 1949, the Central Bank of India have been empowered with the right to supervise and control the activities of various scheduled commercial banks. These powers are related to licensing, branch expansion, liquidity of assets and methods of working of the Bank.
Clearing House Facility: By virtue of its unique position in dealing with domestic and foreign funds the Central Bank has a special position for conducting :
(a) Clearing house operation;
(b) Interbank transfer of funds;
(c) Settlement of accounts.
Clearing house facility means providing an opportunity to member commercial banks to settle their claims on each other mutually. E.g. : Indian Bank has to pay to SBI a sum of ` 2 lakh and SBI has to pay to Indian bank ` 1,50,000. This can be settled with a check of ` 50,000 by Indian Bank on the RBI in favour of SBI. As a result Indian Banks accounts will be debited and SBI’s account will be credited.
Custodian of Foreign Exchange Reserves: Under this system the RBI controls both receipts and payments of foreign exchange. A country have in its foreign trade favourable or unfavourable balance. Favourable balance helps to bring foreign exchange to the country while unfavourable balance means paying foreign exchange out. As custodian of Foreign Exchange, Central Bank keeps a constant watch on the same so that the value of the home currency does not rise or fall adversely in relation to foreign currency. During times of emergency the Central Bank may impose restrictions to control on buying or selling of foreign currencies in the market.
Credit Control: In order to ensure price stability and Economic growth of a country, the Central Bank undertakes the responsibility of controlling credit. The Central Bank ensures price stability and avoids inflationary and deflationary tendencies by several monetary methods such as regulation of Bank rate, open market operation, change in variable reserve ratio, etc.