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Unit 5 A central bank, reserve bank, or monetary authority is an institution that manages a nation's currency, money supply, and

d 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 nation's monetary base, and usually also prints the national currency, which usually serves as the nation's legal tender.[1][2] Examples include the European Central Bank (ECB), the Federal Reserve of the United States, and the People's Bank of China. 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 commercial banks and other financial institutions from reckless or fraudulent behavior. Central banks in most developed nations are institutionally designed to be independent from political interference.


Issue of Currency: The Central Bank is given the monopoly of issuing currency in order to secure control over volume currency and credit. These notes are circulated through out due country as legal tender money. It has to keep a reserve in the form if gold and foreign securities as per the statutory rules against the notes issued by it. It issues notes above Rs.2/-. One Rupee coins and other small coins are issued by the mints of Government.

Bankers to Government: Central Bank acts as the bank of Central and State governments. It carries out al banking business of Government. Government keep their cash balances in the current account with Central Bank. Similarly central bank accepts receipts and makes the payment on behalf of the Government. Also Central bank carries out exchange, remittances and other banking operation on behalf of Government. Central Bank gives the loans and advances for a short period to the Governments. It also manages the public debt of the country.

Bankers Bank & Supervisor: All the scheduled banks are controlled and supervised by the Central Bank. These banks are required to keep certain percentage of their deposits with Central Bank. They can take loans from the Central Bank.

Controller of Credit & Money Supply: Central Bank regulates the supply of money and credit according to the interest of the country. It follows various instruments like (i) Bank rate, (ii) Open Market operations (iii) Cash reserve ratio, (iv) Moral suasion (v) Marginal requirements. They are the instruments of Monitory policy

Exchange Control: It maintains the external value of currency. Every citizen should deposit foreign currency they earn with RBI and they can get foreign currency from RBI with application.

Lender of Last Resort: Scheduled banks can take the loans by rediscounting first class bills or short term approved securities, whenever they do not get funds from any other sources.

Custodian of Foreign Exchange Balance:

Central Bank maintains the balance of foreign exchange gold and bullions.

Clearing house function: Central Bank clears the cheques received by a bank belongs to other banks issued by the customers without delay.

Collection and publication of data: It collects, completes the data regarding the other banks and publishes this information .

EXAM paper What are the bases or elements of Credit The word "credit" has been derived from a Latin word creditum. It meanstrust. Credit refers to the ability to acquire something of value like goods, services, money, or securities at the present time in return for a promise to pay at a certain future time. It involves risks. The possibility that the borrower can not fulfill his promise due to circumstances beyond his control always exists. In granting credit to borrowers, there are bases in evaluating their ability to pay and willingness to pay: Character. This refers to the personal integrity of the borrower. His determination to pay can be evaluated by his past business record. Character also includes personal habits, attitudes, or vices of the borrower. Capacity. This has something to do with the managerial ability of the borrower. Could he use wisely and efficiently his loan? Factors like responsibility, maturity and business competence of the borrower determine his capacity to pay. Capital. This refers to the resources owned by the borrower such as priorities. With such properties, the ability of the borrower to obtain credit has become greater. Collateral. Usually, the title of the land is required as a security of the loan. This is a safety measure for the payment of the loan. Buildings, machines and other valuable properties are used as collaterals. Condition. Conditions in the community, industry, or the whole economy affect the ability of borrowers to pay their loans. For example; peace and order, inflation, profitability of a project, etc. Advantages of a Credit Economy 1. Allows business firms to acquire cash loans by using their machines or buildings as security, instead of selling a part of their physical properties to obtain money. They can also sell bonds to generate more funds for their investment ventures.

2. Dynamic and enterprising men have the opportunity to put up their enterprises through credit. 3. Government projects or programs can be funded through bonds or loans. 4. Credit accelerates production, employment, income, and consumption. 5. Permits low-income consumers to enjoy the consumption of goods and services sooner, like house and lot, appliances, and other consumer products. Disadvantages of a Credit Economy 1. Heavy borrowings by the governments may likely lead into inflation. It requires competent and dedicated monetary authorities, and the cooperation of top government officials to use properly local and foreign loans. 2. Borrowing by the government may result to extravangance and inefficiency. This has been noted by development economists on the credit performance of the developing countries. 3. Business errors in the use of credit funds have unfavorable chain effects on the whole economy. Failure of some firms to settle their debts with other companies affect the latter to pay their bank loans. In turn, the banks cannot pay their depositors. 4. Excessive loans from other countries by the government may likely be a burden to future generation, unless such loans are wisely invested in the economy for the benefits of the masses. 5. In some cases, credit reduces future consumption of debtors.