A Central Bank is the apex bank which controls the entire banking system of a country. It has the sole authority to issue notes in that country. It also acts as a banker to the government and controls the supply of money in the country.
Differences between the Central Bank and a Commercial Bank
| Central Bank | Commercial Bank |
|---|---|
| The Central Bank is the apex bank and is also known as the bank of all the banks. | A Commercial Bank functions under the control of the Central Bank. |
| Focuses on social welfare. | Focuses on profit maximization. |
| Does not accept deposits. | Accepts deposits from the public and provides loans to individuals and households. |
| Issues currency. | Has no authority to issue currency. |
| An advisor to the government on monetary issues | Commercial Bank is not an advisor. |
Reserve Bank of India
On 1st April 1935, the Reserve Bank of India (RBI) was established according to the RBI Act, of 1934. This bank was established as a joint stock bank with a share capital of Rs 5 crore. On 1st January 1949, the RBI was nationalized by the Government of India and it started functioning as a Central Bank of India then.
Functions of the Reserve Bank of India
Issuing of notes:
The Central Bank of a country has an exclusive right of issuing notes. Under the original Act, there was a provision for issuing currency notes according to the proportional reserve system. In India, the RBI can print or issue any volume of currency or notes by keeping a gold reserve worth Rs 115 crore and foreign exchange worth Rs 85 crore.
Banker to the government:
The Central Bank is also a banker, agent and financial advisor to the government. As a banker, it manages government accounts across the country. It buys and sells securities on behalf of the government as its agent. It helps the government in framing policies to regulate the money market by acting as an advisor to the government.
Lender of the resort:
The Central Bank also provides financial assistance to commercial banks by rediscounting eligible bills of exchange. When commercial banks do not get loan facilities from any other sources, they approach the Central Bank as a last resort. The Apex Bank advances loans to such banks against approved securities.
Custodian of the cash reserve:
The RBI acts as the custodian of the foreign exchange reserves of India. One of the essential activities of the RBI is maintaining the external value of the Indian Rupee. The RBI has the authority to enter foreign exchange transactions both on its own account and on behalf of the government.
The market rate of exchange of the rupee is determined by the forces of demand for and supply of foreign currencies in India. The RBI has the discretion to intervene in the foreign exchange market through the purchase and sale of foreign currencies.
Controlling credit:
The Central Bank increases or decreases the supply of money by regulating the creation of credit by commercial banks. Uncontrolled credit causes economic fluctuations. The Central Bank establishes stability not only in the internal price level but also in the foreign exchange rates to control credit effectively. This kind of stability is essential for economic growth and the development of the economy.
Other functions:
The RBI maintains relations with international organizations such as International Monetary Fund and World Bank. It also performs a variety of developmental and promotional functions. It has also been entrusted with collecting and compiling statistical information related to banking and other financial sectors of the economy.
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