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Central Bank: 7 Most Important Functions of the Central Bank of India

7.5 The instruments are sent to the respective sub-member branches along with IBDA and with the slip showing total amount and number of instrument sent retaining the instrument meant for the Member Branch. The instruments are sent to respective branches with the slip showing total amount and number of instruments. The expansion or contraction of currency and credit may be said to be the most important causes of business fluctuations. It mainly arises from the fact that money and credit play an important role in determining the level of incomes, output and employment.

clearing house function of central bank

For eg if a bank A wants to withdraw rs20,000 from bank B and bank B wants to deposit rs 50,000 in bank A than this all the transaction are cared by RBI…. A central bank performs the following functions, as given by De Kock and accepted by the majority of economists. It publishes periodically the reports regarding the operation of various banks.

iv) Representation in International Institutions:

This website includes study notes, research papers, essays, articles and other allied information submitted by visitors like YOU. The business of banking has, therefore, been recognized as a public service necessitating legislative safeguards to prevent bank failures. Thus, keeping in view the aims of uniformity, elasticity, safety and security, the system of note-issue has been varying from time to time. It increases the elasticity and liquidity of the whole credit structure of the economy.

  • It is legally compulsory for the banks to keep a certain minimum fraction of these deposits as cash.
  • As a custodian of the cash reserves of the commercial banks the central bank maintains the cash reserves of the commercial banks.
  • The instrument drawn on other banks are sent to the nearest main branch of the bank of the locality and the instruments drawn on our branch easement direct to the respective branch.
  • Central bank 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.
  • If the supply of foreign currency decreases in the economy, RBI sells them at foreign exchanges, and in case of surplus supply, it buys them.
  • • It collects taxes and other payments on behalf of the government.

On the other hand, central bank, by providing temporary financial accommodation, saves the financial structure of the country from collapse. Commercial banks are required under the law to keep a certain percentage of their total deposits with the central bank in the form of cash reserves. It is a powerful instrument to control credit and lending capacity of the banks.

As mentioned, a clearing house is basically the mediator between two transacting parties. Consider an investor who wishes to sell 500 shares of his stock in Emirates Airlines to another investor. It is the clearing house’s job to make sure that the investor gets paid the proper amount for his 500 shares and that the buyer indeed receives the full amount of shares that he paid for.

Top 9 Functions of Central Bank – Explained!

Granting of monopoly right of note issue to the central bank avoids the political interference in the matter of note issue. Bank for short period by selling their financial securities to the central bank. • The central bank also acts as the financial adviser to the government. For example, in India, one rupee notes and all types of coins are issued by the government and all other notes are issued by the Reserve Bank of India. Clearing houses play a fundamental role in reducing the risk involved with any transaction, while recording and storing important details.

As a clearing house, it settles inter-bank claims and reduces the need for cash reserves by the commercial banks. As bankers’ bank, the central bank acts as a clearing house for transfer and settlement of mutual claims of commercial banks. Since the central bank holds reserves of commercial banks, it transfers funds from one bank to other banks to facilitate clearing of cheques. This is done by making transfer entries in their accounts on the principle of book-keeping. To transfer and settle claims of one bank upon others, the central bank operates a separate department in big cities and trade centres. This department is known as the “clearing house” and it renders the service free to commercial banks.

clearing house function of central bank

Financial institution extends loans of different kinds however to develop the industrial and agriculture sectors and economic development of the country. A new bank or a branch of a living bank cannot be recognized without the earlier permission of the central bank. Central bank transfers the capital of central and provincial governments from one place to another.


This system is operative in India whereby the Reserve Bank of India is required to keep Rs 115 crores in gold and Rs 85 crores in foreign securities. There is no limit to the issue of notes after keeping this minimum amount of Rs 200 crores in gold and foreign securities. Before 1992 all foreign exchange received or earned by residents in India should be surrendered to the banks, which have obtained license from the Reserve Bank of India to deal in foreign exchange. With the purchase of these securities, the power of commercial bank of giving loans increases, which will control deficient demand.

Of the several countries of the world although there may be variations in the degree of functions. This facility of early payment has increased the use of cheque in the country. It also makes policies and takes decisions to avoid undue expansion or contraction of credit and to stable the credit or money system in the country. Financial institution is not only the supervisor of government securities, however, also works for their sale and purchase.

clearing house function of central bank

In other words, in case the commercial banks are not able to meet their financial requirements from other sources, they can, as a last resort, approach the central bank for financial accommodation. The central bank provides financial accommodation to the commercial banks by rediscounting their eligible securities and exchange bills. • In a situation of excess demand leading to inflation, the central bank increases statutory liquidity ratio , which will reduce the cash resources of commercial bank and reducing credit availability in the economy.

• Business and traders get credit from commercial bank against the security of their goods. Bank never gives credit equal to the full value of the security. When the primary cash deposit in the banking system leads to multiple expansion in the total deposits, it is known as money multiplier or credit multiplier. But the banks cannot use the whole of deposit for this purpose.

Banker’s Bank and lender of last resort

• As banker to the banks, the central bank acts as the lender of the last resort. • It represents the government in the international financial institutions (such as World Bank, International Monetary Fund, etc.) and conferences. • It provides cash to the government as resumed for payment of salaries and wages to their staff and other cash disbursements.

As a custodian of the cash reserves of the commercial banks the central bank maintains the cash reserves of the commercial banks. Every commercial bank has to keep clearing house function of central bank a certain percentage of its cash balances as deposits with the central banks. These cash reserves can be utilised by the commercial banks in times of emergency.

This is known as ‘monetizing the Govt’s Debt’ or ‘Deficit Financing’. To establish monetary relations with other countries of the world and international financial institutions. Furthermore, the central bank plays an important role in the design of monetary and fiscal policies that aid in the regulation of money in the market and inflation control.

iii) Foreign Loans:

The cancellation will be dated and initialed by the official signing the vouchers and the letter will be carefully filed / preserved for record/reference. Reference of the letter should also be recorded in the application form. Arranged branch-wise and a main schedule is prepared to enter the same with total amount in the Outward Transfer Delivery Register (B-9). The instruments are sent to the branches concerned for clearance. The Clearing House Book along with the duplicate schedules and filed.

The government spends new currency and puts it into circulation to meet its expenditure. This is to certify that XYZ Of Class XII – D of XYZ has completed his/her project under my guidance and supervision. She has taken proper care and shown utmost sincerity in the completion of this project on central bank and its functions in india.. I certify that this project is up to my expectations and as per guidelines issued by CBSE.

Banks may be classified into scheduled banks and non-scheduled banks. A scheduled bank is one, which is included in the second schedule to the Reserve Bank of India Act. The inclusion of a bank in the second schedule does not guarantee the soundness and stability of the bank. So every scheduled bank is required to keep with the Reserve Bank a cash balance of not less than 3 percent of its total demand and time liabilities.

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