Banking Project
On
Central Bank of India
Submitted To:
Submitted By:
Naveen Sir
Pankaj & Shubham
BCom II 144 & 20
------------------------------------------------Questions And Answers:
Ques1. What is central Bank? State
its Characteristics and Functions.
Answer
:DEFINITION OF CENTRAL BANK !
1. According to 'Samuelson',
"Every Central Bank has one function. Its operates to
Control Economy, Supply of Money and Credit".
2. According to 'Vera smith',
"The primary definition of Central Bank is a banking
system in which a single bank has either a Complete or
Residuary Monopoly of note issue".
3. According to 'Kent',
"Central Bank may be defined as an insitution which
is charged with the responsibility of managing the
expansion and contraction of the volume of money in
the interest of general public welfare".
4.According to 'De Kock',
"A Central Bank is the bank which constitutes the
Apex of the Monetary and Banking Structure of its
Country".
--------------------------------------------------------CHARACTERISTICS OF CENTRAL BANK !
1. APEX INSTITUTION
Central bank is the apex financial institution of a country.
Central Bank Occupies The CEntral place in the Monetary
And Banking System of every Country. Its is the Paex Bank
of a Country through which Economic Policies of the
Country are implemented.
2. NO PROFIT MOTIVE
Central Bank has no motive of earing profits. A Central
Bank aims at maximising the public welfare through
Monetary means. A Central Bank should act only in the
Public Interest and for the welfare of the country as a
whole and without regard to profit as primary
consideration.
3. CONTROL THE ECONOMY
A Central bank influences the Economy in desirable
directions by controlling and managing the expansion and
contraction of the volume of money through various
methods of credit control.
4. USE THE MONETARY MEANS
A Central Bank is National Financial Institution created to
operate and influence the Economy in desirable directions
through monetary means. It controls the money supply
through monetary means like bank rate, open market
operations, change in CRR and in SCR, etc.
----------------------------------------------------------------------FUNCTIONS OF CENTRAL BANK !
1. BANK OF NOTES ISSUE
In Modern Time, The Central bank enjoys Monopoly over
printing or issuing currency notes. The Central bank in
every country has the exclusive privilege of note issue. No
commercial bank can issue its own currency notes.
According to 'Vera Smith', Note issuing is the single most
important function of central banking. Acording to 'De
Kock', alomst everywhere the privilege of note issue is
associated with the origin and development of Central
Banking. Central banks were also known as Bank of ISsue.
Central bank issue notes against the security of gold, silver
and credit instruments. Imparting monopoly right of noteissuing to the Central bank is generally based on the
followoing points :(i) Right of note-issue by the central bank will bring
uniformity in its notes, which is essential for proper
functioning.
(ii) Confidence of people in the currency of the country
grows stronger because the bank enjoys the patronage of
the government.
(iii) It automatically solve the problem of control on Credit
Creations.
(iv) Central Bank beingbthe apex bank of the country has
the complete knowledge of monetary requirements of the
country. It can impart sufficient elasticity to the monetary
system by increasing or decreasing the supply of paper
currency.
(v) Issuing of notes is a profitable business. When it is
done by Central Bank the profit so earned goes to the State
Exchequer.
2. BANKER, AGENT AND ADVISOR TO THE GOVERNMENT
Central bank acts as a Banker, Agent and Financial Advisor
to the government. All the banking business of the
government is transacted by this Bank. It performs the
same functions for the government as the commercial
bank do for their customers. Cental Bank recieves and
makes all payments of behalf of the Government. It accepts
the deopsits from Central or State Government, makes
collections and payments on their behalf, make short term
and long term loans to Government.
As an AGENT to Government, the Central bank manages
national debts and issue of securities and loans on behlaf
of the Government. The Central Bank purchases and sales
the treasury bills and other securities so as to maintain the
adequate money supply in the country. As an AGENT of
the government, it collects the taxes and makes
disbursements on its behlaf.
By acting as an FINANCIAL ADVISOR to the Government, it
gives advice to the government on important matters of
economic policy like deficit financing in a planning
programme, devaluation of the currency, foreign exhange
policy, trade policy, etc. It also acts as a representative of
the Government in International Financial matters. In fact,
it acts as a advisor of the Government on all monetary and
banking matters.
3. CASH RESREVE RATIO MANAGEMENT
The Central bank keeps the cash reserves of the
commercial banks with it and acts as the custodian of
these cash reserve. The Central bank fixes a rate of Cash
Reseve Ratio (CRR) which means that the perecentage of
the term deposits, savings deposits and current deposits is
to be kept with the Central Bank. That ensures safety and
liquidity of the commercial banks and since the credit
creation depends not on a bank but the banking system.
The CRR reserves provide the base for the credit system of
Nation.
According to 'De Kock', "The Centralisation of cash
reserves the Central bank is a source of great sterngth of
the banking system of any country. Centralised cash
resreves can at least serve as the basis of a larger and
more elastic credit structure than if the same amount were
scattered among the individual banks".
4. CUSTODIAN OF FOREIGN EXCHANGE RESERVE OF
NATION
Central bank acts as the cutodian of foreign exchange
reserves of the nation, All the Foreign Exchange that come
in the country is required to be kept with the Central bank.
As the Custodian of foreign exchange reserves, the Central
bank tries to manage it judiciously to overcome the
problems of balance of payments. Its aim is to maintain
reasonable stability in the exchange rates. Central bank
also maintains foreign exchange reserves in order to
promote international trade and stabilise exchange rate.
5. LENDER OF THE LAST RESORT
Central bank also acts as the lender of the last resort for
the other banks of the country. It means if a financial bank
fails to get financial help from anywhere, it approaches the
Central bank as a last resort. Central bank advances loan
to such a bank against approved securities. In this way
Central bank heps salvage the commercial banks. All
commercial banks of the country can avail of loan facilities
from the central bank in two ways(i)They can get their securities or Bills of Exchange
rediscounted from the Central bank, or,
(ii)They borrow from the central bank against their
securities.
6. CLEARING HOUSE FUNCTION
Central bank also acts as a clearing house for member
banks. As the Central bank is the custodian of the cash
reserve of commercial banks, it is an easy and a logical
step for it to act as a settlement bank or clearing house for
other banks. All banks have their account with the central
bank, the claims of banks against another are settled by
simple transfers from one bank to another through mere
book keeping entries. as the claims are settled through
transfer entries, actual currency and coins are not used.
The clearing function has become a necessary service to
be rendered by the Central bank.
7. CONTROLLER OF CREDIT
The most important function of the Central bank is to
control the credit activities of the commercial banks.
Central bank is to regulate the volume of credit and
channelise it into directions suitable for the National
Economy. Credit control refers to the increase or decrease
in the volume of the credit money in accordance with the
monetary requirement of the country. More expansion of
credit than necessary leads to the situation of inflation. On
the other hand, greater contraction of credit money may
create a situation of deflation. With Central bank keeping
credit under proper control, stability in general price level
and increase in output and employment can be achieved in
the country.
8. COLLECTION OF DATA
Central bank collects a variety of statistical data and
publishes the same periodically. Data and information
relating to banking, currency and foregn exchange
position of the country reflect the rate of economic
progress. It also plays an important role in the formulation
of planning and decision-making activities for the proper
functioning of banking system of the country. The data is
published for the use of bankers, governments, planners
and reseachers.
9. AGRICULTURAL CREDIT
Centyral banks of many countries, like RBI in India, also
provide credit facilities for the development of agricultural
sector of the country.
10. MAINTAINING INTERNATIONAL RELATIONS
Central bank represents their countries in International
conferences like IMF, World Bank. In the interest of
International liquidity and economic growth of the
country it becomes essential for central bank to maintain
relations with these institutions and international
development agencies.
Ques2.What is the role of Central
Bank in an Underdeveloped
Economy?
Answer: Role of Central Bank in an
Under-Developed Economy
Central Bank plays a key role in the economic
development of a country. One of the main aims of a
central bank in an under-developed country is to promote
economic development and growth in the following
manner:1. Direct Dealings With Public: In some under-developed
countries, commercial Banking system may not be
sufficiently developed. In such cases, the central bank may
have to perform the commercial banking functions in
addition to central banking functions to encourage the
banking habits among the people.
2. Use of Productive Capacity: The under-developed
countries are not able to use fully the productive capacity
of agriculture and industries due to shortage of finance.
The central bank proves helpful in accelerating the rate of
economic growth by providing adequate finances of these
sectors. The central bank manages the availability of credit
at low rate of interest to the agricultural sector through
cooperative banks, land development bank, regional rural
bank etc.
3. Development of Integrated Commercial Banking
System: A viable commercial banking system is almost
pre-requisite of development of a country. As a leader of a
banking system, the responsibility for developing an
integrated viable commercial banking system falls on the
central bank.
4. Price Stability: Central Bank also helps in stabilizing the
price level in under-developed countries. Money supply is
the main course of fluctuation in the price level. Central
Bank can control the money supply to bring the stability in
prices.
5. Providing Manpower Training: One of the problems
faced by the commercial banks is the lack of trained
human resources. The individual commercial Banks are
not able to establish their own training institutes due to
lack of financial resources. In such Cases, Central Bank
provides the training facilities to the staff of the
commercial banks.
6. Monetary Expansion: The central bank has to ensure
adequate monetary expansion without adversely affecting
the price stability. Economic Development of underdeveloped countries is not possible without adequate
monetary expansion. Monetary expansion is a necessity to
meet the requirements of growing economic activities.
7. Proper branch Expansion: The central Bank is
expected to regulate and formulate branch expansion
programmes throughout the country for its economic
growth. The small savings are not channelized due to lack
of banking facilities. Thus, the objective of the central bank
is to establish and expand banking services to rural areas,
semi urban areas to mobilizing the saving of the people.
8. Ensure Balanced Regional Growth: The central bank is
expected to formulate suitable policies to ensure the
balanced regional growth. Special incentives can be given
to backward areas. Similarly, the benefits of banking
development can be extended to rural areas.
9. Maintenance Low rate of Interest: The interest rates
are very high in under-developed countries, which is the
major problem in economic development. Central bank
helps in keeping the interest rate ata low level.
10. Removal of Deficit in the Balance of Payment: Most
of the under-developed countries suffer from the adverse
Balance of Payments. It is because of more imports than
exports. Central bank helps to promote exports of country
and discourage imports. Thus, it helps in the removal of
deficit in the balance of payments.
Ques 3.What is Credit Control? State
its Objectives and Methods in
Detail.
Answer: Credit Control
Credit Control refers to the regulation of credit by the
central bank for achieving the objective of economic
growth and development
In other words, the policy of credit expansion or credit
contraction is called credit control.
Objectives of Credit Control
1. Exchange Rate Stability: The main objective of credit
control is to maintain exchange rate stability. The
fluctuations in foreign exchange rate of the domestic
currency adversely affect the foreign trade of the
country.
2. Price Stability: Another important objective of credit
control is to stabilise internal price level. The frequent
fluctuations in internal prices bring economic
dislocations and loss of economic welfare and ultimately
effect the social, political and moral structure of the
society.
3. Economic Stability and Growth: Economic Stability
and economic growth is the another important objective
of credit control. Central bank through credit control
tries to accelerate the rate of economic growth of the
country. Central Banks checks the cyclical fluctuations
with the help of credit control which are main
hinderence in the way of ecenomic growth.
4. Maintaining a high level of Employment: Another
objective of credit control is to maintain a high level of
employment through credit control.
5.Control of trade cycles :credit control is also helpful
controlling trade cycles.the trade cycle not only cause
economic instability but also harmful to the economic
interest of the countries concerned.trade cycles can be
controlled by increasing or decreasing the volume of
credit as per requirement.
6.Sabilization of money market: another objective of
credit policy is to provide stabilization of the money
market so as to minimise the interest rate fluctuations due
to temperature factors.
methods of credit control
the central bank is the main body to control the credit.this
method can be broadly classified into two categories:
(A) Quantitative or general methods
(B) Qualitative or selective method
Quantitative methods:
1.Bank rate:Bank rate is the rate of interestwhich is
charged on loans and advances given by the central bank
to commercial bank. bank rate is the rate at which the
central bank undertakes to discount first class securities
or first rate bills of exchange presented by the commercial
bank.
a. Contraction of credit: Where is central bank wants to
contact the credit in the country it increases bank rate.as a
result commercial banks also increase the rate of
interest.now the traders and investors will borrow less
amount from the banks results in contraction of credit.
b. Expansion of credit: When is central bank wants to
expand credit,it lowers the bank rate. As a result rate of
interest goes down.traders and investors will now borrow
more from the bank.Thus here will be extension of the
credit.
2. Open market operations: The purchase and sales of
government securities by the central bank of the country
is known as open market operations.
open market operations attempt to increase decrease the
credit in the system by directly influencing the cash
reserve with the banking system
a. Contraction of credit:When credit is to be contracted in
country , central bank begins to sell securities in the open
market. people buy the securities issued by the central
bank. in this way money starts to flow into the central
bank. therefore commercial bank are obliged to contract
credit creation.
b. Expansion of credit: If the central bank wants to
expand credit, it begins to purchase securities in the open
market. it causes increasing the volume of money. people
deposits more money in banks.Thus able to create more
credit.
3. Change in cash reserve ratio: According to RA Young,
variation in cash reserve ratio implied changes in the
minimum percentage of the deposit to be kept as reserve
funds by the bank with the central bank.
a. Contraction of credit: When the central bank is to
contract credit it increases the ratio of cash reserve.as a
result cash balances of the banks are reduced and the
capacity to create credit is also reduced to the same
extent.
b. Expansion of credit: When the central bank is to
expabd credit it reduces the cash reserve ratio. as a result,
cash balances of the bank are increased and their power to
create credit is also increased to the same extent.
Difficulties of Variable Reserve Ratio
1. this method proves ineffective when commercial bank
happens to possess large reserves, even if the minimum
cash resereve ratio is raised .
2. too frequent changes in the ratio may have a disturbing
effect on the economy.
3. this method involves discrimination against commercial
banks. non banking financial intermediaries remain
untouched.
4.Change in Statutory Liquid Ratio:
It means that the commercial banks have to keep a certain
percentage of their assetsin liquid form compulsory.It also
curtails the power of commercial banks create credit.
Policy of changing statutoy liquid ratio
a. Contraction of credit: When the central bank has to
contract credit it increases the statutory liquid rati. the
banks have to keep a large part of their deposits in form of
cash.It reduces their capacity of creating credit..
b.Expansion of credit: When the central bank has to
expand credit it reduces the statutory liquid ratio. The
banks have to maintain less proportion of their deposits in
the form of cash.It increases their capacity of creating
credit.
B.Qualitative or selective methods
qualitative methods are meant to give the central bank as
ability to affect particular segments of economy which are
as follows:
1. Varying Margin Requirement Method: The margin
requirement is difference between the market value of the
security and its maximum loan value.
Margin Requirement= Value of Security- Amount
Advanced
whrn the commercial banls advances loan onnthe security
of some assets then the amount of loan advanced is less
than the valie of asset pledged.
ADVANTAGES
1. This method is very simple and easy to operate.
2. This method controls the credit inthe speculative area.
In this way demand for speculative credit is controlled.
3. The technique is contributed to stabilise the economy
and mimimise cyclical disturbance.
LIMITATIONS
1.In practice, this method imposes a big responsibility on
central bank.
2. There are leakages of credit to finance security
speculations through non purpose loan to speculators and
to unscrupulous money lenders.
2.Regulation of consumer credit: The regulation of
consumer credit is done by the control of the hire
purchase finance installment purchase and sales of
durable consumer goods.
the central bank can control the consumer credit by
a.Varying he cash down payment required for the
purchase of goods
b. By varing the the maximum maturities period of
installment credit for the purchase of specify durable
consumer good arel laid down.
if the installment period is reduced the monthly
installment will go up and hence some consumers may
find it difficult to purchase the goods. this will result in
reduction of demand for those goods.
Limitations
1. this method does not affect the high income group
2. In this method there is a problem of administration,
compliance and enforcement for central bank.
3.Rationing of credit:
In this method central bank can fix limit for the credit
facilities available to commercial bank. As a lender of last
resort, central bank can introduce can introduce rationing
of credit in four ways:
1.it can decline to give loan to a particular bank
2. it can scale down the amount of loans to be given two
different banks
3. it can fix quota of the credit to be given two different
banks.
the introduction of rationing makes the commercial banks
cautious in matter of advancing loans.
the problem with this method is that the commercial
banks dislikes restrictions being imposed on them.they
cannot follow on independence policy according to their
own inclinations.
4.Direct Action:
Direct action refers to direct dealing with individual bank
which adopt policies against the policies of the central
bank.central bank maybe obliged to take action against
defaulting banks, if they do not follow the policy laid down
by the central bank.the action may take many forms:
1. rediscount facilities may be refused.
2. the central bank may not grant further accommodation
by way of landing its to defaulting bank.
The following Difficulties of this method are:
a.It is difficult to distinguish between the legimate
activities for the advance of loans and illegitimate ones or
between essential or non essential enterprises
5.Moral Persuasion:
It is not a statutory obligation, it is made a request to
commercial bank not apply fund for speculative
activities.central bank has used moral persuasion over the
other banks to get them agree to his credit control policy
as an instrument of credit control.
through this technique central bank persuades and seeks
the cooperation from commercial banks in checking and
restricting non essential activities.
6.Publicity and Propaganda:
central bank give wide publicity tobits credit policy
through media publicity.the main purpose bring the
banking community under the pressure of public opinion
enforcing them to follow only that credit policy which is in
the interest of the economy of the country.the success of
this technique of credit control depends upon the extent to
central bank is able to build up public opinion.