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

1:Monopoly of note issue. 2:Banker to government. 3:Lender of the last resort. 4:Controller of the credit .

1:Monopoly of note issue

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:

1:Currency principle 2:Maximum fiduciary system 3:Proprtional reserve system

Note issuance

2: Banker to the Government

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 govt, pay pensions and salaries to employees
Advisor in financial matters to the government Agent to the govt in international banking and financial markets.

3:Lender of the last resort

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..

4:Controller of credit
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. 1:Bank rate policy 2:Change in reserve ratio 3:Credit rationing. 4: Direct action

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 1: Bank rate policy 2: Open market operation 3: Credit rationing 4: Direct action 5: Reserve ratio

1: Bank rate policy

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.

2: Open market Operation

It refers to purchase and sale of govt 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

3:Changes in reserve ratios

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

Credit Control Methods

Fixation of Margin
Banker lends money against price of securities. The amount of loan depends upon the margin requirements of the banker. The word margin here it means the difference between the loan value and market value of securities. The central bank has the power to change the margins, which limits the amount of loan to be sanctioned by the commercial banks. During inflation higher margin would be fixed and during deflation lower margin would be fixed.