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Central Banking P a g e | 1 SEMESTER-III, S.Y.B.M.S CENTRAL BANKING GUIDE: PROF. VIJAY KAPOOR P a g e | 2 GROUP MEMBERS SR ROLL NAME SIGN NO. NO 1. 56 RAFIYA CHALLANGAYAM 2. 60 SAUDAH KHATRI 3. 63 MASOOM SHELIA SR NO. TOPIC PAGE NO. 1. INTRODUCTION 5 2. DEFINITION 5 P a g e | 3 3. HISTORY 6 4. NEED OF CENTRAL BANKS 6 5. OBJECTIVES 7 6. FUNCTIONS 7 7. REDISCOUNTING & 8 LENDER OF LAST RESORT 8. CENTRAL BANKS BY 8 COUNTRIES 9. INFLUENCES 9 10. ACTIVITIES 11 11. RESERVE BANK OF INDIA 12 12. PREAMBLE OF RBI 12 13. HISTORY 12 14. FUNCTIONS 14 15. RESERVE BANK OF INDIA 16 ACT(1935) 16. CREDIT CREATION 17 17. MONETARY POLICY 18 18. TYPES 21 19. CONCLUSION 22 20. CONTRIBUTION 23 P a g e | 4 ACKNOWLEDGEMENT We would like to thank, our Professor Mr. Vijay kapoor for giving us an opportunity to take the topic “central banking” for our project. He has truly explained us the topic in a very wide sense by explaining all the aspects which are a part of central banking He has also acted as our guide and mentor in giving us all the possible details and important points which were necessary in making this project successful CENTRAL BANKING INTRODUCTION A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the P a g e | 5 government of whichever country the bank exists for, and to other commercial banks, typically as a 'lender of last resort'. However, a central bank is distinguished from a normal commercial bank because it has a monopoly on creating the currency of that nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. Its primary function is to provide the nation's money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently. Most of the rich countries today have an "independent" central bank, that is, one which operates under rules designed to prevent political interference. Examples include the European Central Bank (ECB) and the Federal Reserve System in the United States. Some central banks are publicly owned, and others are privately owned. For example, the United States Federal Reserve is a quasi-public corporation. DEFINITION OF CENTRAL BANKING The central bank has been described as "the lender of last resort", which means that it is responsible for providing its economy with funds when commercial banks cannot cover a supply shortage. In other words, the central bank prevents the country's banking system from failing. However, the primary goal of central banks is to provide their countries' currencies with price stability by controlling inflation. A central bank also acts as the regulatory authority of a country's monetary policy and is the sole provider and printer of notes and coins in circulation. Time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime. The central bank should also be completely divested of any commercial banking interests. THE HISTORICAL ANTECEDENTS OF CENTRAL BANK IN INDIA In India, the efforts to establish a banking institution with central banking character dates back to the late 18th century. The Governor of Bengal in British India recommended the establishment of a General Bank in Bengal and Bihar. The Bank was set up in 1773 but it was short-lived. It was in the early 20th century that, consequent to the recommendations of the Chamberlain Commission (1914) proposing the amalgamation of the three Presidency Banks, the Imperial Bank of India was formed in 1921 to additionally carry out the functions of central banking P a g e | 6 along with commercial banking. In 1926, the Royal Commission on Indian Currency and Finance (Hilton Young Commission) recommended that the dichotomy of functions and divisions of responsibilities for control of currency and credit should be ended. The Commission suggested the establishment of a central bank to be called the Reserve Bank of India, whose separate existence was considered necessary for augmenting banking facilities throughout the country. The Bill to establish the RBI was introduced in January 1927 in the Legislative Assembly, but it was dropped due to differences in views regarding ownership, constitution and composition of its Board of Directors. Finally, a fresh Bill was introduced in 1933 and passed in 1934. The RBI Act came into force on January 1, 1935. The RBI was inaugurated on April 1, 1935 as a shareholders’ institution and the Act provided for the appointment by the Central Government of the Governor and two Deputy Governors. The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b). NEED FOR CENTRAL BANKING - to regulate the activities of commercial banks - to integrate the activities of commercial banks - to direct the policies according to the best interest of the national banking - to stabilize the monetary and banking system of the country - to implement monetary policy to regulate and control credit - to maintain the external value of the country’s currency in terms of key foreign currencies such as Dollars, Euros , Pounds etc - to maintain the country’s international liquidity position at a safe margin - to exercise a reasonable control over foreign exchange - to secure the advantages of centralised cash reserves OBJECTIVES OF CENTRAL BANK - To help ensure the monetary stability of the country. - To assist in regulating the financial system of the country P a g e | 7 - To formulate, implement and monitor the monetary policy. - To maintain the liquidity in the country. - To ensure adequate flow of credits. - Prescribes parameters for banking in the country. - Maintain public confidence in the system. - To manage the foreign exchange Management Act. - To facilitate external trade. - Issue and exchange currency. - Maintain supply of currency. - Own and operate the depository and exchange for government bonds. - Banker to the government FUNCTIONS OF CENTRAL BANKS 1-Sole right of note issue The Central Bank in every country, now, has the monopoly note issue. The issue of notes is governed by certain regulation which is enforced by the state. 2-Banker to the state A Central Bank acts as a banker to the government. It holds cash balances of the government free of interest. 3- Banker's bank. The central bank acts as a banker to the commercial banks. The Central Bank acts as a clearing house for the settlement of mutual obligations of different commercial banks. If a difference exists, it is paid by a cheque drawn on the banks accounts carried at the Central Bank. 5-Lendor to the last resort The Central Bank helps the member banks in times of crisis. 6-Financial agent The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange. 7-Effective monetary policy P a g e | 8 The aim of the government is to create employment in the country, resist undue inflation and achieve a favorable balance of payment. CENTRAL BANK AS THE BANK OF REDISCOUNT AND THE LENDER OF LAST RESORT The function of rediscount and lender of last resort developed out of the special position of the bank which was granted the complete residual monopoly of note issue in the country and whose notes enjoyed the privilege of being legal tender. The function of lender of last resort was historically associated with that rediscount, since it was through the lack of the latter function that the former came to be fulfilled. The rediscount function however preceded that of lender of last resort, while in many countries it has remained the custom for the central bank to rediscount for individual banks as a matter of convenience to them , at any time ,and not only when they had exhausted all other available sources and methods for the replenishment of their funds. CENTRAL BANKS BY COUNTRIES- List of central banks 1) Australia- Reserve bank of Australia 2) Bahrain-Central bank of Bahrain 3) Canada-Bank of Canada 4) Dominican Republic- Central Bank of Dominican Republic 5) Egypt- Central bank of Egypt 6) France-Bank of France 7) Guyana- Bank of Guyana 8) Hong Kong Monetary Authority 9) India- Reserve Bank of India 10) Japan- Bank of Japan 11) Kyrgyzstan- National Bank of Kyrgyz Republic P a g e | 9 12) Libya – Bank of Libya 13) Malaysia- Bank Negara Malaysia 14) Nepal- Central Bank of Nepal 15) Oman – Central Bank of Oman 16) Pakistan- State Bank of Pakistan 17) Qatar- Qatar Central bank 18) Russia- Central Bank of Russian Federation 19) Serbia- Central Bank of Serbia 20) Thailand-Bank of Thailand 21) Uganda- Bank of Uganda 22) Vietnam – State Bank of Vietnam 23) West African Economic and Monetary Union – Central Bank of West African States. 24) Yemen- Central bank of Yemen HOW THE BANK INFLUENCES AN ECONOMY A central bank can be said to have two main kinds of functions: (1) Macroeconomic when regulating inflation and price stability (2) Microeconomic when functioning as a lender of last resort .
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