CONCEPT OF CENTRAL BANK: According to
R.P.Kent, Central bank is “an institution
charged with the responsibility of managing
the expansion and contraction of the volume
of money in the interest of the general public
welfare.”
The essential feature of a central bank is its
discretionary control over the monetary
system of the country. The central bank also
acts as the leader of the money market and in
that capacity; it supervises, controls and
regulates the activities of the commercial
banks. A bank is called as a central bank
because it occupies an important position in
the monetary and banking structure of the
country in which it operates. Thus, the central
bank is an institution whose main function is
to help, control and stabilize the monetary
and banking system of the country in the
national economic interest.
According to W.A.Shaw, the central bank is
that bank which controls credit. Paul
Samuelson defines central bank as a bank of
bankers. Its duty is to control the monetary
base or high powered money.
Central banking is a new phenomenon. It is a
twentieth century financial institution. The
central bank of the Federal Reserve System in
USD was established by 1913. The Reserve
bank of India was set up on 1 st April, 1935
under the Reserve bank of India Act, 1934.
The Imperial Bank of India was set up by the
amalgamation of the three presidency banks,
in 1921 which had performed a few central
banks’ functions. The imperial Bank served as
a banker to the government and in same
capacity as a banker’s bank till the
establishment of the Reserve bank of India in
1935.
The need for central bank in India was
stressed by the Royal Commission on Indian
Currency and Finance popularly known as the
Hilton Young Commission, in 1926. The
Commission also suggested the name
“Reserve bank of India” for the country’s
Central Bank. The Indian Central banking
Enquiry Committee also made a strong
recommendation for the establishment of the
Reserve Bank. Accordingly, a fresh bill was
introduced in the Indian Legislative Assembly
on 8th September, 1933. This bill was passed
and received the assent of the Governor
General on 6th March, 1934 and became the
Reserve bank of India Act, 1934. The Reserve
bank of India was constituted in accordance
with this Act and commenced its operations
from 1st April, 1935.
OBJECTIVES OF CENTRAL BANKS: The aim of
the Central Bank is to regulate the issue of
bank notes and keeping of reserve with a view
to securing monetary stability in the country
and to operate currency and credit system of
the country to its advantages. At the same
time pressing the necessity to establish a
central bank in India, Hilton Young
Commission stressed the establishment
objectives of establishment of a central bank
in the country.
1.To abolish weak currency system: the
Central bank is established in the country to
achieve many objectives. In India, particularly
the currency was regulated by the
Government. The Hilton Young Commission
found that separation of these functions was
defective from the point of view of economic
development of a country. It pointed out the
inherent weaknesses of a system in which the
control of currency and credit is in the hands
of two distinct authorities whose policies may
be widely divergent and in which currency
and banking services are controlled and
managed separately from one another.
2.Maintain value of currency: it is necessary
to maintain the value of currency of a country
stable. The Central Bank assumes the function
of controller of currency, to secure monetary
stability in the country. The establishment of
the Reserve bank of India was also thought to
be necessary to maintain the value of rupee
stable.
3.Appropriate Credit Policy: The Central Bank
of a country has to pursue an appropriate
credit policy for the country. In India, the
Reserve Bank of India was given the power to
pursue an appropriate credit policy.
Accordingly the RBI can control the credit
created by the banks in the country by its
bank rate policy and other weapons which it
has been vested by virtue of various statutes,
particularly Reserve Bank of India Act and the
Banking Regulation Act.
4.To act as Banker’s Bank: The Central bank
acts as a banker’s bank. The Reserve bank of
India is a banker’s bank which has control
over the cash reserves of the commercial
banks. In India, RBI acts as a Central Bank and
it provider’s loans and advances to medium
and small scale banks.
5.Control over Banking System: The Reserve
bank of India has been given powers to issue
licenses to the banking companies in the
country. It can also inspect the books of
accounts of the banking companies and issue
them appropriate directions.
6.Leadership in Money Market: Another
objective of the Central Bank was to remove
structural instability of the banking systems
and to provide leadership to the money
market. The Financial Institutions and Banks
can also do the same process for other
subjects.
FEATURES OF BANKING:
Banking has been defined as “Accepting for
the purpose of lending and investment, of
deposits of money from the public, repayable
on demand, order or otherwise and
withdrawable by cheque, draft or otherwise.”
The essential features of banking are given
below:
1.Dealing in Money: The banks deals in
money. They accept deposits from the public.
There are different types of deposits such as
savings, current, fixed, recurring, etc. Banks
advance money as loans to the needy people.
There are again different types of advances
such as cash credit, term loans, bill
discounting, overdrafts, etc. Thus, the banks
are basically dealer in money.
2.Agency: Banks act as an agents of the
customer. They provide variety of agency
services, besides the basic function of
accepting deposits and lending money. Fund
transfer, credit cards, Tele banking, cheque
clearing, bills collection are some of the
services provided by the banks as an agent.
3.Credit Creation: The banks can create
credit. It is an additional function of bank.
Creating of credit is an unique feature of
banking. Every deposit can create credit.
Additional money can be created for the
purpose of lending. However, there is a limit
for such credit. The Reserve bank of India has
adopted certain measures to control credit
created by the banks. Thus banks have to
follows the restrictions laid down by the
Reserve bank of India in this respect.
4.Commercial Nature: All the banking
functions are carried out with the aim of
making profit. Therefore, the nature of
business of banks is commercial. They pay
interest on deposits and these deposits are
advanced to the needy persons at a higher
rate of interest. Therefore, there is a fixed and
minimum margin of profit in banking
operations. Besides, these banks are also
charge for the services rendered to the
customers and add the profit.
5.Withdrawable Deposits: The deposits made
by the customers can be withdrawn by
cheques, draft or otherwise. The banks issue
cheque books to their customers. The
customers have an option to withdraw money
either by cheque or withdrawable slip. The
deposits can be withdrawn on demand.
However, fixed deposits can be withdrawn at
maturity and these deposits cannot be
withdrawn by cheques by the customers.
There are certain restrictions on the numbers
of withdrawals in case of saving deposits.
NEED FOR BANKS: We need banks in our day
to day life. Banks cater to the needs of
farmers, businessmen, traders, industrialists
and common people in the society. Common
people save money, which they put into the
bank for safety, security and getting some
return out of it. Businessmen, traders and
industrialists open their accounts in the bank
and carry out their transactions for receipts of
payment of money through cash or cheques.
They can also get loans from the bank for
financing their business activities. Farmers can
borrow money from the banks for seeds,
irrigation, fertilizers, etc. they can also save
and banks for seeds, irrigation, fertilizers, etc.
They can also save and invest their surplus
money in the banks. Thus, banks are needed
by every section of our society.
Banks are an indispensable part in a modern
developing society. They act as an agent of
their customers in performing the functions
such as collection of dividends, pensions,
purchase and sales of securities and payment
of salary and other expenses. We cannot carry
out all cash transactions in these days,
because, it is risky and time consuming. We
cannot also keep large amount of cash in
hand. In this respect, banks help the
businessmen and all other people by
accepting their deposits and allowing
withdrawals by cheques and transfer of
money.
Banks are also needed by the government.
Banks act as an agent as well as banker of the
government. They collect money from the
public, tax payers and businessmen on behalf
of the government and the payment are also
made through the banks. Government makes
the payments by cheques for which bank
account are required. Only a bank can issue
cheque books to the depositors because they
are authorized by the banking regulation act.
Modern banks touch almost every sphere of
economic activity. They collect savings and
other funds from the people and rechannalise
these funds to borrowers for financial
investments. Thus, banks, by collecting saving,
lending money and by generating money, play
an important role in the economic
development of a country.
Commercial banks in India were started
during the latter half of the 19th century.
Three Presidency banks dominated the
banking space i.e. bank of Bengal, Bank of
Bombay and bank of Madras. The Reserve
Bank of India was set up in 1935.
A bank performs a multitude of functions and
services which cannot be reached into a single
definition. A bank may mean different things
for different people. For some it is a
storehouse of money, for others an institution
of funding or finance and yet to many others,
a bank is a depository for their savings. The
structure and pattern of banking in India is
based largely on the British banking system
which is largely branch banking.
PRINCILES OF LEANDING:
In order to protect their own interest as well
as national interest the following principles
should be followed by the banks:
1.Safety: Banks lend money out of the
deposits received from the public. Therefore,
their deposits must be safe. Safety depends
upon the security offered by the borrower
and the repaying capacity and willingness of
the borrower to repay the loan with interest.
Thus, bank should ensure that the security
offered is adequate and reading realizable.
Safety in the most important principle of good
landing.
2.Liquidity: The bank has to repay the
depositors on demand. In order to meet the
demand of the depositors in time, the bank
should keep its funds in liquid from. The
liquidity refers to the ability of an asset to
convert into cash in short time. It is not
enough that the money should come back, it
is also necessary that it must come back on
demand or in accordance with agreed terms
of payment. The borrower must be in a
position to repay within a reasonable time
after demand for repayment is made. Thus,
sources of repayment must be definite.
3.Profitability: Banks are commercial
institutions. They should earn profit to pay
interest on deposits, declare dividend to their
shareholders, meet administrative and
operation expenses and provide for
depreciation, reserves, etc. In other words the
banks should earn profit for their survival. The
banks should utilize funds in such a way that
they will bring adequate return.
Pledge: It is the bailment of goods, a security
for payment of debt. A pledge occurs when
goods are delivered to the bank and the
goods pledged will be returned to the
borrower on repayment of the loan. Thus, the
goods serve as security for the loan. A pledge
is created when goods are delivered by one
person to another for securing debt. It is the
bailment of goods as security for payment of
debt or performance of a promise. In a
contract of pledge, there are two parties, a
bailor and a bailee. The person who pledge
the goods is called bailor and the person to
whom goods are pledge is called the bailee. A
borrower is called the bailor or pledger and
the banker is called the bailee or pledge.
Goods which are of a movable nature are
pledged to the bank. Charge on shares,
debentures, fixed deposit receipts, units of
UTI and National Savibg Certificates can be
created by the bank by way of pledge.
Transfer of possession, is compulsory in case
of pledge, though ownership continues to
remain with the pledge. If the borrower fails
to repay the loan within the stipulated time,
the banker can sell the security pledged by
giving reasonable notice to the pledger or he
may file a suit against the pledger to recover
the debt and retain the property pledged as
security.
PACKING CREDIT: Packing credit is defined by
the Reserve Bank of India as “Any loan to an
exporter for financing the purchase,
processing, manufacturing or packing of
goods”. It is an interim advance provided by
the bank for helping the exporter to purchase
process, packing and shipment of the goods
for exports. It is also known as PRE-SHIPMENT
FINANCE. It is provided by any bank or
financial institution. The exporters generally
require finance at the pre-shipment stage for
the following purpose:
1.TO purchase raw materials, components,
machinery equipment and technology.
2.To pay for transportation and warehouse
expenses.
3.For specialized export packing of goods.
4.To pay insurance premium on shipment of
goods.
5.To clear the goods after inspection, customs
and excise authorities.
6.To pay commission to overseas agents.
7.To pay freight for shipment of goods.
8.To provide additional working capital from
time to time.
NABARD: Reserve Bank of India has been
showing keen interest in agricultural credit
and maintained a separate department for
this purpose. A National Bank For Agriculture
and Rural Development (NABARD) was set up
to take over the agricultural credit functions
of RBI as well as refinance functions of ARDC.
The NABARD was set up in July, 1982 by Act of
Parliament. The Bank was linked organically
with the RBI. The RBI contributed half of its
capital and other half was contributed by the
government of India. The Government has
powers to appoint three Board of Directors on
the bank and the Deputy Governor of RBI was
appointed as a chairman of NABARD. The
authorized share capital of the bank was Rs.
500 crores and its paid up capital was Rs. 100
Crores. The paid up capital of NABARD was
raisedto Rs. 1000 Crores. NABAED draws
funds from the Government of India, the
world Bank and other agencies. It also
borrows from RBi. World Bank has been
providing funds to NABARD for
implementation of project Financed by it.
Functions of Central Banks: The important
functions of central banks are as follows:
1.Monopoly Power of note-issue: Central
banks print money, distribute notes and coins,
intervene in foreign exchange markets to
regulate the national currency’s rate of
exchange with other currencies and manage
foreign asset reserves to maintain the
external value of the national currency.
Commercial banks in many countries enjoyed
the power to issue notes in the nineteenth
century. However, the notes issued by them
lacked uniformity. Governments many
countries began to perform this function. But,
governments could not be prevented from
over-issuing or under-issuing notes.
Therefore, the central bank has been given
the monetary power of note issue.
2.Banker’s Bank: Commercial banks are
required, by law or convention, to keep a
certain bank. Thus, the central bank acts as a
custodian of cash reserves. Banks draw cash
balances from the central bank as and when
the situation demands. As a banker’s bank, it
acts as a lender of last resort. This sort of
accommodation makes the central bank a
lender of last resort.
3.Controller of credit: In a modern credit
oriented economy, bank credit is an
important component of money supply.
Being profit seeking institutions, commercial
banks may adopt a policy of under expansion
or contraction of credit to suit their needs.
This may lead to inflation or deflation neither
of which is desirable. To ensure price stability
the supply of bank credit is to be regulated.
This is supposed to be the most important
function of central bank.
4.Banker to the government: cental bank
provide bank deposit and borrowing facilities
to the government while simultaneously
acting as the government’s fiscal agent and
underwriter. The central bank acts as a
banker, agent and advisor to the government.
5.Custodian of foreign exchange reserves
:Central banks interfere in foreign exchange
markets to regulate the national currency’s
rate of exchange with other currencies and
manage foreign asset reserves to maintain the
external value of the national currency.
6.Promotinal and developmental functions: in
case of less developed economies, the central
bank acts not only as a controller and
regulator of credit but also as a promoter .
7.Regulator of domestic financial institution:
Central banks ensure that commercial banks
and other financial institutions conduct their
business prudently and in accordance with
relevant laws and regulations.