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Bank
Central Bank
Central Bank does not work for profits though it might secure
profits. While Commercial Banks aim at securing maximum
profit for their shareholders, the Central Bank aims at
controlling the banking system and supporting the economic
policy of the government.
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ii.
iii.
iv.
Bank of Issue
Central Bank has the exclusive monopoly of note issue
and the currency notes issued by the Central Bank are
declared unlimited legal tender throughout the country.
This monopoly brings about:
Uniformity of note issue which in turn facilitates trade
and exchange within the country
Enables the Central Bank to influence and control the
credit creation of Commercial Banks
Gives distinctive prestige to the currency notes
Enables govt. to appropriate partly or fully the profits of
note issue.
c.
e.
g.
Controller of Credit
RBI controls the level of credit in the economy by either
expanding or contracting bank deposits. In modern times, bank
deposits have become the most important source of money in the
country. As controller of credit, RBI seeks to influence and control
the volume of bank credit and also to stabilize business conditions
in the country.
Functions of RBI
Monetary Authority
Formulates, implements and monitors the monetary
policy.
Objective: maintaining price stability and ensuring
adequate flow of credit to productive sectors.
Functions of RBI
Manager
of Exchange Control
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and
promote orderly development and maintenance of foreign
exchange market in India.
Issuer
of currency
Issues and exchanges or destroys currency and coins not
fit for circulation.
Objective: to give the public adequate quantity of supplies
of currency notes and coins and in good quality.
Functions of RBI
Developmental role
Performs a wide range of promotional functions to support
national objectives.
Related Functions
Banker to the Government: performs merchant banking
function for the Central and the state governments; also acts
as their banker.
Banker to banks
Maintains banking accounts of all scheduled banks.
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4.
OMO - Advantages
Strategically, OMO
OMO - Limitations
Commercial
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2.
3.
Limitations of CRR
De
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b.
c.
Margin Requirements
Banks do not lend the entire amount of the
project cost or security value. Part of the project
cost has to be met by the businessmen investing
in a venture. Margin money is the personal stake
of the investor in a given investment. Banks or
Central Bank can directly encourage or
discourage an activity by either decreasing or
increasing the margin requirements respectively.
For certain export related ventures, govt.
recommends even waiver of margin requirement.
Moral suasion:
Moral suasion implies persuasion and request made by
the Central Bank to the Commercial Banks to follow the
general monetary policy of the former. The
effectiveness of moral suasion is debatable. As a method
of credit control, it may have restraining influence, but
when real forces in favour of credit expansion or
contraction are very strong, persuasive tactics may be
ineffective. While this method has a psychological
advantage as it does not carry any threat or legal
sanction, it may not be very effective in times of serious
business boom or depression especially in developing
countries.
Rationing of credit
Credit rationing is a method of controlling and
regulating the purpose for which credit is granted by the
Commercial Banks. It may assume two forms. Firstly,
variable portfolio ceilings refer to the system by which
the Central Bank fixes a ceiling or maximum amount of
loans and advances for every Commercial Bank.
Secondly, variable capital assets ratio refers to the
system by which the Central Bank fixes the ratio which
the capital of the Commercial Bank should have to the
total assets of the bank. Rationing of credit may also be
in the form of the Central Bank allowing only a fixed
amount of accommodation to member banks by means
of rediscount.
b.
c.
d.
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