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Functions of Central Bank

These functions are performed almost by all the central banks of the several countries of the world although there may be variations in the degree of functions.

Sole right of note issue:

 In every country, the central bank has sole right monopoly of note issue. This authority has been given central bank for:

(a) Uniformity in the notes.

(b) To check undue expansion of notes.

(c) To regulate currency according to its demand.

(d) To make sure that notes issued are the liability of the bank and get full support of state.

Keeping the Deposits:

Central bank keeps the deposits of the central and provincial governments. It makes payments on the behalf of government. However, it does not pay interest on government deposits.

Advances Loans:

As a fiscal agent, the central bank provides loans to government and makes investments in Treasury Bills and Long-term Government securities.

Foreign Loans:

Central bank makes arrangements to get foreign loan on the demand of government.

Transfer of Capital:

Central bank transfers the capital of central and provincial governments from one place to another.

Financial Advisor to Govt.:

Central bank also advises the government on economic matters such as or revaluation of the currency and balance of payments etc. controlling inflation or deflation, devaluation

Keeping of Accounts of Govt. departments:

Central bank keeps the accounts of different departments of govt. It does not charge any fee or commission for said service.

Govt. Securities:

Central bank is not only the custodian of Government securities, but also works for their sale and purchase.

Custodian of Cash Reserves:

The commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposits with the central bank.

Clearing House:

As a banker’s bank, the central bank acts as a clearinghouse for the settlement of mutual claims of commercial banks. once the central bank holds reserves of commercial banks, it transfers funds from one bank to the other banks to facilitate e clearing of the cheques by making entries on the principles of bookkeeping without using cash.

Lender of Last Resort:

Central bank acts as the lender of last resort for the commercial banks. The central bank lends to the member or scheduled banks in times of stress to save their financial structure.


he member commercial banks can re-discount their bills from central bank in the time of need.

Opening of New Bank:

A new bank or a branch of an existing bank cannot be established without the prior permission of central bank.

Advance Policy:

Central bank regulates the policies of advancing loan for commercial banks and fixes the rate of interest to be charged.

Growth of Banks:

It is the duty of the central bank to promote the growth of the banking system on a sound footing.

Leader of Capital Market:

Central bank is considered as the leader or guardian of the capital market because it works for its establishment and growth. It also makes policies and takes decisions to avoid undue

expansion or contraction of credit and to stable the credit or money system in the country. The steps are taken or methods adopted by the central bank in this regard are called monetary policy.

Controller of Foreign Exchange:

Central Bank is responsible for the management of foreign exchange and maintenance of the external value of the home currency. Moreover, foreign exchange reserves are also kept with the central bank. It prepares the balance of payment accounts of the country and helps the government to keep balance favorable.

Custodian of Metallic Reserve:

Central bank is a supervisor or custodian of metallic reserves (gold and silver etc.) of its country. It keeps them with banks and other institutions are also kept with central bank. great care and safety. The metallic reserve of commercial

Exchange Rate Stability:

Central bank fixes the exchange rates of the domestic currency in terms of foreign currencies. It holds these rates within narrow limits in keeping with its obligation member of the International Monetary Fund and tries to bring stability in foreign exchange rates.

Representative of foreign trade:

Central bank acts as the representative of government in intonational trade. Besides, making investment in the international market, it also provides foreign exchange to importers and exporters of the country.

Staff Training:

Central bank not only provides modern training of banking to staff but also establishes training institutes in this regard. (e.g.) Institute of Bankers etc.

Growth to Saving:

Central bank makes plans and adopts various methods to promote the habit of saving among the people of the country.

Industrial & Agricultural Development:

Central bank extends loans of different kinds to develop the industrial and agriculture sectors of the country.

Representation in International Institutions:

Central bank acts as the representative of government for International institutions like IMF etc.

Membership Fee:

If the government wants to become the member of international institutions, then central bank pays membership fee (e.g.) SAARC and Security Council etc.

Financial Reports:

Central bank publishes periodical reports relating to different aspects of monetary and economic policies.

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