Role of Central Bank in Economic Development

The economic stability of a country is solely dependent on the central bank. It is the only financial institution in the country which is responsible for regulating the banking and monetary system of the country. The need of central bank in a country is essentially felt considering the following services rendered by a central bank for economic development of a developing country.

1. Capital Formation: Economic progress of a country requires adequate amount of capital. Capital is required for agriculture, industrial and commercial development. But in a developing country, it is a chronic problem to procure capital. Central bank as a national institution plays prime role in capital formation in the interest of the nation as a whole. As the guardian of the money market, it regulates the capital flow in the country in proper form and suitable time.

2. Credit Control: Credit is one of the most important source of financing trade and industry. The central bank as the controller of credit can encourage a particular sector of economy by adopting selective credit control.

3. Stability in Prices: The central bank keeps the price level stable in the country by controlling money and credit supply.

Weapons of Credit Control (Qualitative Controls)

1. Direct Action: The central bank may take direct action against commercial banks that violate the rules, orders or advice of the central bank. This punishment is very severe of a commercial bank.

2. Moral persuasion: It is another method by which central bank may get credit supply expanded or contracted. By moral pressure it may prohibit or dissuade commercial banks to deal in speculative business.

3. Legislation: The central bank may also adopt necessary legislation for expanding or contracting credit money in the market.

4. Publicity: The central bank may resort to massive advertising campaign in the news papers, magazines and journals depicting the poor economic conditions of the country suggesting commercial banks and other financial institutions to control credit either by expansion or by contraction.

Credit Control

Credit control is one of the principal functions of the central bank. Credit money expands through commercial banks by means of cheques. Credit plays an important role in maintaining and changing the price level as a medium of exchange. It is the responsibility of the central bank to regulate the volume of credit and its direction to maintain stability of the price level.

Credit control means, regulating the volume and direction of bank loans. On the volume of credit depends largely the level of employment and the level of prices in the country.

Functions of Central Bank

The central bank is the private of all the banking system. The chief functions of a central bank may be described as follows:

1. Issuing Notes: The central bank has the sole responsibility and monopoly of issuing notes within the country. It is the sole currency authority. The central bank is required to keep a certain percentage of gold reserves against issue of notes.

2. Government’s Bank: The central bank acts as a financer of the government. It keeps the government funds in the custody free of interest. It helps the government in designing a fiscal policy for the country so it also plays the role of financial advisor to the government.

3. Banker’s Bank: It acts as the custodian of cash reserve or balances deposited compulsorily by the scheduled banks. Either by law or custom the member banks have to keep certain portion of their deposits with the central bank as reserve.

4. Credit Control: Probably the most important function performed by the central bank is that of controlling the credit operations of commercial banks. Control of credit means the regulation and control of bank advances.

5. Clearing House: It is the “Clearing House” of the banks. Under this function central bank facilitates the settlement of bills and cheques of other banks.

6. Exchange Control: It is the responsibility of the central bank to control foreign exchange and maintain the rate of exchange. It prepares the balance of payment accounts of the country, and helps the government to keep the balance favourable.

7. Custodian of National Reserve: It is the central bank which serves as the custodian of a nation’s reserves of gold and foreign exchange. It is its duty to take appropriate measures to safeguard these reserves.