Central bank and its Functions Central bank and its Functions
Hamro Library
Hamro Library

Central bank and its Functions


Central bank

The central bank is the supreme bank of a country. It is the monetary authority. It is the apex for monetary and banking structure of the country. In every nation, a central bank is established in order to arrange for the circulation of currency throughout the country, develop the financial sector and stability in the exchange rate. Nepal Rastra Bank is the central bank of Nepal which was established on 14th Baisakh 2013 B.S. It is because of the banker of the banks which keeps the cash revenue of commercial banks.

Functions of the central bank

1. The monopoly of note issue

The primary function of a central bank is to issue notes in the country. It has the monopoly right of issuing bank notes subject to certain safeguard (deposits of gold and silver) imposed by the law. In Nepal, Nepal Rastra bank issues the notes under proportional revenue system.

2. Government’s banker, agent and advisor

Central bank fulfills the function of bankers, agent, and advisor of the government. The central bank maintains the banking account of government departments, boards enterprises, etc. The government purchases securities like treasury bills and sells it through the central bank. It advises the government to formulate monetary and fiscal policies in the country.

3. Bank of all banks

The central bank is also called the bank of banks of the country. It keeps the cash reserve of commercial banks. All the commercial banks and other banks have their account in the central bank. So, it performs as a bankers bank.

4. Lender of the last resort

The central bank is the lender of last resort. It is the ultimate source of funding of commercial banks. During the hard times of commercial banks, central bank advances loans to a commercial bank.

5. Provides clearing house facilities

The central bank also acts as the shelter of financial claims of a bank against others. Each commercial bank maintains its bank in the central bank. The central bank clears each other's claims of their respective accounts.

6. Custodian of the foreign currency and Metallic reserve

The central bank is the custodian of the national reserves of foreign currencies. It keeps and manages the foreign exchange reserve of the country. It purchases and sells foreign on behalf of the government. It is the custodian of metallic reserves like gold, silver, and other expensive metals.

7. Control of credit

Credit control refers to the arrangement of credit according to the requirement of the economy. The central bank controls credit by using credit control instruments such as open market operation, changes in the statutory reserve requirement of banks, bank rate policy, control over interest, etc.

8. Foreign exchange control

The central bank of any country holds the absolute right to regulate and control foreign exchange operations. The foreign exchange rate is determined with the help of demand for and supply of the foreign currencies under flexible exchange system. Likewise, the exchange rate Is determined with a mutual agreement under the fixed as exchange regime of system.

9. Development function

A. Publication of rate and information

B. Helps to develop the money market and capital market by providing guidance, regulation, supervision, and monitoring

C. Promotion of agriculture sector

D. Promotion of trade sector

E. Promotion of individual sector

F. To achieve high and sustainable economic growth

G. Reducing poverty

H. Maintain relation with international financial institutions.

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