Central bank : functions, credit control

Central bank

A central bank, reserve bank, or monetary authority is a public institution that manages a state's currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the amount of money in the nation, and usually also prints the national currency, which usually serves as the nation's legal tender.Examples include the European Central Bank (ECB) and the Federal Reserve of the United States.

The primary function of a central bank is to manage the nation's money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also have supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.

Activities and responsibilities 

Functions of a central bank may include:

• implementing monetary policies.
• determining Interest rates
• controlling the nation's entire money supply
• the Government's banker and the bankers' bank ("lender of last resort")
• managing the country's foreign exchange and gold reserves and the Government's stock register
• regulating and supervising the banking industry
• setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms

Credit Control

Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that the commercial banks grant. Such a method is used by RBI to bring “Economic Development with Stability”. It means that banks will not only control inflationary trends in the economy but also boost economic growth which would ultimately lead to increase in real national income with stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being controlled by RBI would lead to Social and Economic instability in the country.

Need for Credit Control 

 The basic and important needs of Credit Control in the economy are-

• To encourage the overall growth of the “priority sector” i.e. those sectors of the economy which is recognized by the government as “prioritized” depending upon their economic condition or government interest. These sectors broadly totals to around 15 in number.

• To keep a check over the channelization of credit so that credit is not delivered for undesirable purposes.

• To achieve the objective of controlling “Inflation” as well as “Deflation”.

• To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.

• To develop the economy.

Objectives of Credit Control 

• Attain stability in exchange rate and money market of the country.
• Meeting the financial requirement during slump in the economy and in the normal times as well.
• Control business cycle and meet business needs.