The central bank is the institution that controls the monetary and banking structure of the country.
The central bank (CRB)is a non-profit making the financial institution. CRB is at the highest point of the whole financial system of the country. CRB has monopoly power of note issue. In other words, it is the principal banking and monetary institution of a country. It controls and regulates the activities of other banks. It is under government ownership and management. It regulates the monetary and credit conditions to attain the goals of the state.
Functions of Central Bank:
A central bank is the apex institution of a country’s monetary system. Since the monetary system of the country, in any case in a developing country, a central bank is also the apex institution of its financial system. As such it plays a leading role in organizing running, supervising, regulating and developing the monetary-financial system.
A central bank performs many important and essential functions which are described as follows:
A. Traditional functions
1. A monopoly of note issue: The central bank has a monopoly power of note issue in every country. Hence, it is also called “bank of issue”. The note issue by CRB becomes unlimited legal under money through out the country. It makes easier for the government to control and make the supervision of note-issuing function. The uniformity in note ensures people’s confidence in notes. NRB is the CRB of Nepal, which has issued the denominations of Rs. 1, Rs.2, Rs. 5, Rs.10, Rs.20, Rs. 25, Rs. 100, Rs. 250, Rs. 500 and Rs. 1000 in Nepal.
2. Lender of Last resort:
Not only in theory, but also in practice CRB comes to the rescue of other banks in times of crisis. The bank faces a crisis when there is excess pressure on deposits payments. If the banks cannot make payment in time people lose confidence in the banks. This creates a banking crisis. In that situation, CRB works as a last resort. CRB provides such resort in two ways:
a. By rediscounting bill or purchasing gout securities.
b. By providing loans against the short- term securities.
3. Credit control:
The CRB has the most important function in modern times to control credit operations of commercial banks i.e. regulating the volume and direction of bank loans. The volume of the credit depends largely on the level of employment and the level of prices in the country. The CRB helps in controlling credit by several traditional and selective means listed below:
Methods of credit control:
Traditional or Quantitative
1. Bank rate
2. Open market operations
3. Variable reserve ratio
Selective or Qualitative
1. Variable margin requirement
2. Variable interest rate
3. Regulations of consumer credit
4. Credit ceiling
5. Moral suasion
4. Foreign exchange control/ reserve of a country:
The CRB holds all foreign exchange reserve- key currencies such as US dollars, British pounds, gold stock, gold bullion and other similar reserves in its custody. The external reserve is the reserve i.e. freely available for use as an international currency. In other words, the CRB maintains and stabilizes the external value of the home currency, administers exchange controls and manages foreign exchange reserves.
5. Clearinghouse agent:
The CRB acts as a/ the clearinghouse agent for commercial banks. Since all banks have their account with CRB, it can easily settle the claims of various banks against each other.
6. Bankers Bank:
The CRB works as the banker of other banks. The CRB holds the right supervision control on the other banks for the sound development of the banking system. Acting as the custodian of cash reserve of the commercial banks, the CRB maintains the cash reserves of the commercial banks. The commercial banks have their accounts in the CRB. Every commercial bank of a country has to keep a certain percentage of the cash balance as (compulsory cash reserve) deposits with the CRB. Such reserves can be used by commercial banks to meet the emergencies.
B. Development functions:
In addition to these traditional functions, the CRB performs various promotional and developmental functions. On the one side, CRB helps to develop the money market and capital market. On the other side, it plays the role to bring about a rapid expansion of rural banking facilities and also to make adequate funds available to finance development programs in respect of agriculture, trade, transport, industry, etc. Its functions are listed below:
a. It helps to develop the money market and capital market.
b. It formulates monetary policy to maintain price and exchange rate stability and to promote economic development.
c. It helps in developing the banking system and the banking habits in the country.
d. It collects various types of statistics by conducting surveys of the current state of the economy and publishes them.
e. It provides training facilities to the staff workers in various banking institutions.
f. It raises short- term and long- term debts on behalf of the government.
g. It maintains relations with international financial institutions such as world bank, IMF, ADB, etc.
h. To achieve economic prosperity of the country, it has launched some special financial programs and also helped to implement national income economic policies like poverty alleviation programs, employment programs, etc.