Functions of Commarcial Banks
Central banking functions have evolved gradually over decades. Their evolution has been guided by ever-changing need to find new methods of regulating, guiding and helping the financial system (particularly, the banks). In other words, the evolution of central banking functions has tended to coincide with the evolution of the financial systems of the world economies. Let us recount the leading functions.
1. Note Issue:
It is considered one of the primary functions of a central bank. The entire financial system of a country, with ever-increasing volume and variety of the financial instruments, institutions and markets, needs a stable supply of legal tender money. This legal tender should tend to vary, both in volume and composition to the changing requirements of the economy. Accordingly, the central bank of the country is granted the sole right to issue currency (including that of the government of the country) and (ii) a monopoly of issuing bank notes (which are its promises to pay).
2. Banker's Bank:
The second main function of a central bank is that of being a bank of the banks. This function includes the following interrelated sub-functions.
(a) The first sub-function is its being a custodian of the cash reserves of the commercial banks. The exact form of this function has varied from country to country and in terms of legal provisions. Historically, commercial banks discovered that it was convenient and economical to hold deposit balances with the central bank for making payments to each other. In some countries, however, the banks are compelled by law to hold deposit balances with the central bank and this gives it an additional tool to regulate credit creation by them. The legal provision to this effect was first introduced in US. Later, it was adopted in India also. RBI has found it a very effective regulatory tool and has used it very extensively.
To begin with, bank deposits were categorised into demand deposit liabilities and time deposit
1. Note Issue:
It is considered one of the primary functions of a central bank. The entire financial system of a country, with ever-increasing volume and variety of the financial instruments, institutions and markets, needs a stable supply of legal tender money. This legal tender should tend to vary, both in volume and composition to the changing requirements of the economy. Accordingly, the central bank of the country is granted the sole right to issue currency (including that of the government of the country) and (ii) a monopoly of issuing bank notes (which are its promises to pay).
2. Banker's Bank:
The second main function of a central bank is that of being a bank of the banks. This function includes the following interrelated sub-functions.
(a) The first sub-function is its being a custodian of the cash reserves of the commercial banks. The exact form of this function has varied from country to country and in terms of legal provisions. Historically, commercial banks discovered that it was convenient and economical to hold deposit balances with the central bank for making payments to each other. In some countries, however, the banks are compelled by law to hold deposit balances with the central bank and this gives it an additional tool to regulate credit creation by them. The legal provision to this effect was first introduced in US. Later, it was adopted in India also. RBI has found it a very effective regulatory tool and has used it very extensively.
To begin with, bank deposits were categorised into demand deposit liabilities and time deposit