You are on page 1of 17

Central Bank

Chapter # 5
Central banking

A central bank is an institution which is


responsible for safeguarding the financial
stability of the country.
Function of The Central Bank

.Monopoly of note issue:1


.Banker to government:2
.Lender of the last resort:3
. Controller of the credit:4
Monopoly of note issue:1
The central bank of a country is responsible for
.issuing currency notes for it

The notes issued should be according to the needs


.of trade and industry
:Methods of note issue
Currency principle:1
Maximum fiduciary system:2
Proprtional reserve system:3
Note issuance
Banker to the Government :2
Central Bank :Is a banker to the government of
.the country
It performs all services which a commercial banks do
.for its customers
.…like
Collect taxes on behalf of gov’t, pay pensions and 
salaries to employees

Advisor in financial matters to the government 

Agent to the gov’t in international banking and 


.financial markets
Lender of the last resort:3
The central Bank acts as lender of the last
.resort for the commercial banks
It helps other banks during their financial
.difficulties

For this purpose it advance loans to


..……banks
Controller of credit:4
The most important function of central
bank
in modern times is that of controlling the
credit operations of commercial banks by
…regulating their credit volume
.…For controlling credit C.B use

Bank rate policy:1


Change in reserve ratio:2
.Credit rationing:3
Direct action :4
Credit Control(Monetary policy)
Credit control is necessary for
…economic stability in a country

Central bank increase or decrease the credit


according to the needs of a country for
achieving
economic stability through controlling
.supply of money
Methods of Credit Control
It adopts various methods for this
…purpose

Bank rate policy :1


Open market operation :2
Credit rationing :3
Direct action :4
Reserve ratio :5
Bank rate policy :1
Bank rate is the rate of interest at
which central bank advances loans to the
.commercial banks

When central bank increase the bank rate,


commercial banks raise interest rate in giving
.out loans ,for decreasing the flow of money

When central bank decrease the bank rate,


commercial banks lower the interest rate in giving
.out loans, for increasing the flow of money
Open market Operation :2
It refers to purchase and sale of gov’t
securities by the central bank in open
,market
)Purchase and sale of any kind of paper(
…During inflation
Central bank sells securities which results decrease in
…supply of money
…During deflation
Central bank purchase securities which results increase in
supply of money
Credit rationing :3
Under this method Central bank allots
credit quota(portion) to commercial banks
…on basis of their business

…In case of inflation


…Central bank decrease credit quota
…In case of deflation
.…Central bank increase credit quota
Direct action :4
If commercial banks are following the
policy that is inconsistent with the monitory
…policy of central bank

It can take direct action by


imposing penalty over
commercial banks…Like
.banning its new branches
Changes in reserve ratios:5
Central bank also control the credit by
changing the reserve ratios of commercial
....banks which is normally 25%
:In times of inflation
Central bank increase the reserve ratio
:In times of deflation
Central bank decrease the reserve ratio

You might also like