Central Bank: Functions of Central Bank, Objectives of Central Bank, Duties of Central Bank

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Central Bank

Every independent country has its central bank.

It is known as ‘bank of government and bank of banks.’

Central bank of Nepal is ‘Nepal Rastra Bank.’

It was established in April 1956 AD (14^th Baishakh 2013 BS).

It is the bank of government as well as bank of banks. All the monetary activities of government are operated by central bank.

 

 

Definition

According to Oxford Dictionary, “Central bank that does business with the government and other banks; It issues coins and paper money of the country.”

According to Vera Smith, “Central bank is a banking system in which a single bank has complete monopoly of note issue.”

 

 

Nepal Rastra Bank (Central Bank of Nepal)

 

Keep in Mind

Central Bank of SAARC:
Afghanistan	Da Afghanistan Bank
Bangladesh	Bangladesh Bank
Bhutan	Royal Monetary Authority of Bhutan
India	Reserve Bank of India
Maldives	Maldives Monetary Authority
Nepal	Nepal Rastra Bank
Pakistan	State Bank of Pakistan
Sri-Lanka	Central Bank of Sri Lanka

 

Functions of Central Bank

There are many functions of central bank; out of them, some important functions are given below:

Currency issue

Central bank issues all the currency of the nation.

Currency issue is the monopoly work of central bank.

To issue currency in Nepal, central bank must deposit 50% value of notes as gold, silver or foreign currency.

 

Keep in Mind (KIM)

Suppose, bank wants to issue currency of Rs 50,00,00,000 (fifty crore), central bank must deposit value Rs 25,00,00,000 (twenty five crore) as gold, silver or foreign currency.

Central bank of developed country, deposits 100% to 200% value of gold as security for currency issue.

 

Bank of government

Central bank of the nation acts as bank of government.

It acts as agent and monetary advisor of the government also.

All the monetary system, interest rate, foreign exchange rate, banking policy, financing matter etc are fixed on behalf of government.

 

Bank of banks

Central bank is the bank of banks.

All the rules, regulations and policy of bank and finance company are operated by central bank.

Without permission of central bank, no-one financial intuitions can be operated.

They must follow the rules and regulations of central bank.

 

Custodian of bank

Central bank is the major bank of the country. It is the bank of banks.

Every commercial bank must deposit some part of authorized capital as security with central bank.

Without security deposit, a bank cannot commence its business.

Therefore, central bank is the custodian of other banks.

It also provides loan to commercial bank at the time of need.

It also advices to them on financial and economic matter.

 

Custodian of foreign currency

Central bank is the major custodian of foreign currency.

Nation receives foreign currency from different sources like export, travel, remittance etc.

All foreign currencies are deposited into central bank.

Therefore, central bank is the custodian of foreign currency.

It also provides foreign currency when needed.

 

Last lender

Central bank works as last lender of the commercial bank.

At the time of liquidity crisis in the nation, central bank provides loan to commercial banks.

It not only provides loan but also provides financial advice.

In this way, commercial can be saved from being failure.

 

Clearing house

The first clearing-house was established in New York City, USA in 1853 AD.

Clearing house means an institution where financial transactions between member banks are canceled against each other loan and discount, leaving only balances to be paid.

Central bank works as clearing-house.

Clearing-houses act for their members in dealing with out-of-town banks.

Clearing-house examines the books of their member banks independently.

It also audits and investigates.

Reports are confidential and are given only to the investigated banks.

 

Credit control

Central bank is the bank of banks.

It has full power to control entire banking system.

Therefore, it controls interest rate, open market operation, change in reserve ratio, loan limit on various purposes etc.

 

Data collection

Central is the bank of government.

It collects all the data related to government time-to-time.

Such as gross national product (GNP), gross domestic product (GDP), census, foreign index, different indexes etc.

From these data, government takes decision for different purpose.

 

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Objectives of Central Bank

The main objectives of central bank are given below:

(a) It can change such directives to cope with the changing economic situation and government policy.

(b) Regulation to safeguard the people’s deposit made in the commercial banks and financial institutions.

(c) To prevent the affecting effect, central bank acts as a lender of the last resort, which is necessary to prevent the national economy from crisis.

(d) Regulations also prevent the commercial banks from performing undesired activities in view of the national economy.

(e) It helps to prevent the bank from being suffered by the several economic problems.

(f) Promote efficiency of commercial bank to operate in profit.

(g) Ensure adequate fund to meet all cash demands

(h) Maintain clear and fraud free financial transactions

(i) Record all financial transactions as per the banking rules

 

Duties and Role of Central Bank

There are different types of duties or roles of central bank; out of them, some important roles are given below:

(a) To issue currency for the country according to monetary system,

(b) To act as the bank of government,

(c) To manage or command inflation and deflation,

(d) To manage for formulate foreign exchange, policy and implement of policy,

(e) To determine or fix foreign exchange rate,

(f) To issue license to financial institutions like commercial bank, development bank, finance company,

(g) To establish and promote the system of payment, clearing etc.

 

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