RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

Rajasthan Board RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

The central bank is the apex bank of every country.

Central bank organizes and controls the monetary and financial system of a country.

It is responsible for stable economic development, total employment, price level stability and for maintaining a strong balance of payment.

The name of Central Bank of America is ‘Federal Reserve Bank’.

The name of Central Bank of England is ‘Bank of England’.

The name of Central Bank of India is ‘Reserve Bank of India’.

Reserve Bank of India is the regulator of the entire monetary and financial sector of the country.

Reserve Bank of India also has the exclusive right of issuing notes.

Central bank performs many tasks. For example, it is the bank of issuing notes, banker to the goverment, banker’s bank and it performs supervisory role, lender of the last resort, custodian of foreign exchange, controller of credit, etc.

Central bank of a country has the exclusive right of issuing notes, so that the flow of currency is maintained.

Central bank regulates the commercial banks.

Central bank saves money for the government as well as it makes payment on behalf of the government.

RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

Central bank is the custodian of nation’s foreign exchange reserves.

The primary function of central bank is to control the supply of credit in the economy.

Central bank performs the functions of a clearing house. It restricts transfer of cash between the banks and reduces the requirement of cash.

The Central bank also acts as a controller and regulator of quantity of currency and credit.

There are two methods of credit control by the central bank :

  1. Quantitative, and
  2. Qualitative.

In Quantitative methods, Bank Rate policy, open market functions or CRR and SLR are included.

In qualitative methods, seletive credit control, rationing of credit, moral pressure, promotion and direct action are included.

Bank rate policy is the most popular method which the central bank adopts for controlling credit.

Bank rate is the rate at which the central bank advances loan to the commercial banks.

Under open market operation, the central bank buys and sells goverment securities to the public or banks.

In the event of inflation, government securities are sold by the central bank to handle the situation of excess demand.

RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

In deflation situation, goverment securities are purchased by the central bank to handle the situation of deficit demand.

By reducing the percentage of CRR and SLR, credit can be expanded.

By raising the percentage of CRR and SLR, credit can be reduced.

Central bank adopts selective credit control measures for specific sectors and specific requirements.

Through rationing of credit, credit is controlled by the central bank.

Central bank sometimes controls the credit through moral pressures.

The method of publicity used by the RBI is also helpful in controlling credit of the economy.

If the commercial banks do not follow the methods suggested and do not follow the policies of the central bank issued from time to time, then, the central bank has the legal right to take direct action.

The Reserve Bank of India was incorporated on 1st April, 1935. RBI is the central bank of India.

At present, its headquarters is established in Mumbai.

Before April 1, 1949, RBI was a private company.

On April 1, 1949, Reserve Bank of India was nationalised.

RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

Management and operation of Reserve Bank of India is in the hands of its central board of directors. There are twenty members in the board.

There is one governor and maximum of four deputy governors along with ten directors from different fields, and two government officials and four directors, one from each of the four regional boards.

Reserve Bank issues the currency and forms the monetary policies.

Reserve bank manages the foreign’ exchange.

It is a regulatory body for all the other banks.

RBI performs a wide range of promotional functions for development of different sectors.

The RBI acts as a commercial bank for the central and state governments.

It publishes reliable information regarding money credit and economic condition of the country.

RBI controls and regulates currency with the help of monetary policy.

For that, it combines different techniques of monetary policy : repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio, which are modified.

RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

Comparison of Central Bank with Commercial Bank

  1. The objective of commercial bank is to earn profit, but on the contrary, the objective of central bank is to regulate and control banking system and not to earn profit.
  2. Commercial banks create credit through derived deposits, whereas the central bank controls credit through the issue of currency.
  3. Commercial banks advance loan to the public, whereas the central bank does not advance loan to the public.
  4. Commercial banks accept deposits from their customers, whereas the central bank does not deal with the customers directly.
  5. Commercial banks follow credit and monetary policy issued by the central bank, whereas the central bank is a banker’s bank and financial advisor to the goverment.
  6. Customer may deposit any amount with their convenience in the commercial banks, whereas it is essential to keep a fixed percentage of deposits of commercial banks in the central bank.

Important Definitions

  1. Bank Rate : The bank rate is that rate at which the central bank lends funds as a lender of last resort to other banks, against approved securities or eligible bills of exchange.
  2. Repo rate : It refers to the rate charged by RBI on short-term loans advanced to the commercial banks.
  3. Reverse repo rate : It is that rate of interest which the RBI pays to commercial banks on their short-term deposits.
  4. Cash reserve ratio : Reserve bank is the apex bank of all commercial banks. Therefore, all banks are required to keep a percentage of its deposits with the central bank. This is called Cash Reserve Ratio (CRR).
  5. Statutory liquidity ratio : As per the reserve bank order, each commercial bank of the country has to keep a cash reserve with itself. This is a fixed percentage of its total deposits. It is called Statutory Liquidity Ratio (SLR).

RBSE Class 12 Economics Notes Chapter 19 Central Bank: Functions and Credit Control

Important Definitions of Central Bank

  1. According to A. C. H. Day,”A central bank is that bank which helps to control and stabilize the monetary and banking system”.
  2. According to Samuelson,”A central bank is a banker’s bank and its responsibility is to control the monetary base and high power money.”
  3. According to Hawtrey, “Central bank is the banker’s bank because it workers as a last resort of lending for the banks”.
  4. According to Prof. Shaw,” Central bank controls the credit in the country.”

RBSE Class 12 Economics Notes