The central bank of a country is responsible for controlling the money supply and formulation of monetary policy. It acts as a bank for both the government and commercial banks. Some key functions of central banks include having the sole right of currency issuance, providing loans to the government and acting as the lender of last resort for commercial banks. Central banks use various quantitative and qualitative methods to control the credit in the economy and influence monetary conditions. These include tools like adjusting the bank rate, open market operations, changing reserve requirements, and using moral suasion to guide commercial bank lending.

1. Commerce
ZoneBy
Navratan Sir

2. Macro Economics Class -12
Money & Banking

3. Central Bank
 A central bank is a financial institution given privileged control over the
production and distribution of money and credit for a nation or a group of
nations. In modern economies, the central bank is usually responsible for the
formulation of monetary policy and the regulation of member banks.
 Samuelson defines a Central Bank, as a bank of bankers. It's duty is
to control the monetary base and through the control of high powered
money, to control the community's supply of money.

5. Functions of Reserve Bank of India.
 Sole Right of Note Issue:- Central Bank (RBI) in India has been given authority to
print the currency notes defined as legal tender . At present it issues notes of Rs 2, 5,
10,20,50,100,200,500,2000. No other bank or any agency can print the currency
notes.
 Bankers, Agent & advisor to the Government:Central bank functions as a banker to
the government—both central and state governments. Government keeps their cash
balances in the current account with the central bank. Similarly, central bank accepts
receipts and makes payment on behalf of the governments. Also, central bank carries
out exchange, remittance and other banking operations on behalf of the government.
Central bank gives loans and advances to governments for temporary periods, as and
when necessary and it also manages the public debt of the country. Remember, the
central government can borrow any amount of money from RBI by selling its rupees
securities to the latter.

6.  Bankers to the commercial Banks:
Central bank acts as banker’s bank in three capacities:
(i) It is the custodian of their cash reserves. Banks of the country are
required to keep a certain percentage of their deposits with the central bank; and in
this way the central bank is the ultimate holder of the cash reserves of commercial
banks,
(ii) Central bank is lender of last resort. Whenever banks are short of funds,
they can take loans from the central bank and get their trade bills discounted. The
central bank is a source of great strength to the banking system,
(iii) It acts as a bank of central clearance, settlements and transfers. Its
moral persuasion is usually very effective so far as commercial banks are
concerned.

7.  Controller of Credit:Central bank controls credit and money supply through
its monetary policy which consists of two parts—currency and credit. Central
bank has monopoly of issuing notes and thereby can control the volume of
currency.
 Clearing Agent: Banks receive cheques drawn on the other banks from their
customers which they have to realise from drawee banks. Similarly, cheques on
a particular bank are drawn and passed into the hands of other banks which
have to realise them from the drawee banks. Independent and separate
realisation to each cheque would take a lot of time and, therefore, central bank
provides clearing facilities, i.e., facilities for banks to come together every day
and set off their chequing claims.

8.  Development Role: Central plays important role in development of the
nation by making lucrative but controlled policy to control inflation rate by
adopting many policies.
 Other functions of Central Bank: Collection and publications of data,
issuing licence to private and govt banks, NBFC, foreign exchange etc.

9.  Lender to the last Resort:
When commercial banks have exhausted all resources to supplement their funds at
times of liquidity crisis, they approach central bank as a last resort. As lender of
last resort, central bank guarantees solvency and provides financial
accommodation to commercial banks
(i) By rediscounting their eligible securities and bills of exchange
(ii) By providing loans against their securities. This saves banks from
possible failure and banking system from a possible breakdown. On the other
hand, central bank, by providing temporary financial accommodation, saves the
financial structure of the country from collapse.

10. Credit Control

11. Quantitate Methods in Credit Control.
 Bank Rate:If the Central Bank wants to control credit, it will raise the bank
rate. As a result, the market rate and other lending rates in the money-market
will go up. Borrowing will be discouraged. The raising of bank rate will lead to
contraction of credit.
 Open Market Operations: This method of credit control is used in
two senses:
 In narrow sense—the Central Bank starts the purchase and sale of Government
securities in the money market. But in the Broad Sense—the Central Bank
purchases and sale not only Government securities but also of other proper and
eligible securities like bills and securities of private concerns.

12. Quantitate Methods in Credit Control.
 3. Variable Cash Reserve Ratio:
Under this system the Central Bank controls credit by changing the Cash Reserves
Ratio . Under this method all commercial banks and co-operatives banks are
supposed to keep some part of their deposit with RBI, if this rate goes higher it
shrink credit in market , if it increases it reduces credit in market.

13. Statutory Liquid Ratio
1. LR - Statutory Liquidity Ratio - Every bank is required to maintain at the
close of business every day, a minimum proportion of their Net Demand
and Time Liabilities as liquid assets in the form of cash, gold and un-
encumbered approved securities. The ratio of liquid assets to demand and
time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is
empowered to increase this ratio up to 40%. An increase in SLR also
restricts the bank's leverage position to pump more money into the
economy.
Net Demand Liabilities - Bank accounts from which you can withdraw your
money at any time like your savings accounts and current account.
Time Liabilities - Bank accounts where you cannot immediately withdraw
your money but have to wait for certain period. e.g. Fixed deposit accounts.

14. Qualitative Method
 Rationing of Credit:Rationing of credit refers to fixation of credit quotas for
different business activities which is introduced when the flow of credit is to be
checked particularly for speculative activities in the economy.
 Margin Requirement: The practice of margin requirement is adopted
by all the bankers to determine the loan value of a collateral security offered by
the borrower. ... 120, at 20 per cent margin requirement is: 120 – 24 = 96.
Hence the maximum of loan of Rs. 96 can be granted on this security by a
commercial bank.

15.  Regulation of Consumer Credit:
Regulation of consumer credit is designed to check the flow of credit for consumer
durable goods. This can be done by regulating the total volume of credit that may be
extended for purchasing specific durable goods and regulating the number of
installments through which such loan can be spread. Central Bank uses this method to
restrict or liberalize loan conditions accordingly to stabilize the economy.
 Control through Directives:
Under this method the central bank issue frequent directives to commercial banks.
These directives guide commercial banks in framing their lending policy. Through a
directive the central bank can influence credit structures, supply of credit to certain
limit for a specific purpose. The RBI issues directives to commercial banks for not
lending loans to speculative sector such as securities, etc beyond a certain limit.

16.  Publicity:This is yet another method of selective credit control. Through it
Central Bank (RBI) publishes various reports stating what is good and what is
bad in the system. This published information can help commercial banks to
direct credit supply in the desired sectors. Through its weekly and monthly
bulletins, the information is made public and banks can use it for attaining
goals of monetary policy
 Moral Suasion: It implies to pressure exerted by the RBI on the indian
banking system without any strict action for compliance of the rules. It is a
suggestion to banks. It helps in restraining credit during inflationary periods.
Commercial banks are informed about the expectations of the central bank
through a monetary policy. Under moral suasion central banks can issue
directives, guidelines and suggestions for commercial banks regarding reducing
credit supply for speculative purposes.