Explain the functions of a central bank?

A central bank is the apex banking institution that controls the entire banking system of a country. The Reserve Bank of India is the central bank of India. It controls the money supply in an economy. Its objective is social welfare.

1. Lender of last resort:

● When the commercial banks have used all their resources to meet their financial needs, they resort to the central bank of the country in times of liquidity crisis.

● As a lender of last resort, the central bank gives them financial accommodation.

● This is done either by redeeming their eligible securities or bills of exchange. or by providing loans against their securities.

● This saves the bank from any possible case of failure and avoids breakdown.

2. Banker to the Government:

● A central bank is a bank to the government.

● It performs all the banking functions as provided by the commercial banks to the customers.

● The government has deposits kept in the central bank.

● The central bank undertakes all the interbank transfers of the government.

● It provides agency services to the government and manages public debt.

● It provides advisory services regarding money and capital market, economic policy, etc.

3. Authority of currency issue -

● The central bank of a country has the sole authority to issue currency in our country.

● It leads to uniformity in the system of the issuance of currency and promotes efficiency in the financial system.

● It also gives more control to the central bank over the supply of money.

4. Banker’s bank:

● Central Bank keeps the cash balance of the commercial banks and issues loans as per the requirement.

● It is similar to the activities that a commercial bank performs for its customers.

● The relation between a central bank and a commercial is just like the relationship between a commercial bank and the general public.

5. Supervision:

● Central Bank acts as a supervisor for all the commercial banks of a country.

● The supervision is done in the form of licensing of the commercial bank, expansion, and opening of new branches, mergers, and liquidation of the banks.