Objectives of Credit Control

The central bank makes efforts to control the expansion or contraction of credit in order to keep it at the required level with a view to achieving the following ends.

1. To save Gold Reserves: The central bank adopts various measures of credit control to safe guard the gold reserves against internal and external drains.

2. To achieve stability in the Price level: Frequently changes in prices adversely affect the economy. Inflationary and deflationary trends need to be prevented. This can be achieved by adopting a judicious of credit control.

3. To achieve stability in the Foreign Exchange Rate: Another objective of credit control is to achieve the stability of foreign exchange rate. If the foreign exchange rate is stabilized, it indicates the stable economic conditions of the country.

4. To meet Business Needs: According to Burgess, one of the important objectives of credit control is the “Adjustment of the volume of credit to the volume of Business” credit is needed to meet the requirements of trade an industry. So by controlling credit central bank can meet the requirements of business.

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.

Exchange Bank

Exchange bank deals mainly in the finance of the foreign trade of the country. It deals in foreign exchange. On the other hand, the main function of such bank is to buy and sell foreign currencies, rather titles to foreign exchange, drafts, telegraphic transfers etc. It purchases the bill of exchange which arises in connection with the import and export trade of the country and they deal in exchange.

The exchange banks liquidate the international indebtedness by exporting and importing precious metals and securities, if necessary. They purchase bills and in the international money market and deposit those with their banking agents in big commercial centers like London, Paris, New York etc. They draw and sell their own drafts on these deposit accounts.

Origin of Banking

Modern banking system, in practice, is spread over the whole civilized world from England. The banking system originated from the following three sources:

The Goldsmiths:
In ancient time, it was very difficult for an individual person to protect his wealth. So, some persons having the qualities of solvency, safety and safety, were trusted to keep money of the people as deposits. The depositors would be given slips as the proof of their deposits. With the reputation of gold smiths these slips were accepted by the people instead of money in transacting business. These slips were the origin of modern bank notes.

Money-Lenders:
Money lenders were those people who lend their own money to the people and earned profit in the form of interest. They were considered original bankers.

Merchants:
The merchants were considered respectable people due to good repute of dealings and strong financial background. These merchants mainly financed foreign trade by issuing slips through their agents. These slips were the origin of modern bills of exchange, bank's draft, letters of credit etc.

Importance of Banking

Bank plays a significant role in the economic development of the country. The whole economy of a country is absolutely dependent on the efficient and well-organized banking system. Industrial, agriculture and commercial progress of a country is not possible without a good banking system.

The importance may be defined as follows:

* Banks deal in foreign exchange by purchasing and selling foreign currencies and by issuing letters of credit.

* Banks play the prime role in accumulating capital by collecting the scattered savings of the people.

* Banks utilize their collected funds by advancing loans to commercial and industrial undertakings.

* Banks perform various agency services on behalf of their customers. They collect or make payment of bills of exchange, dividend, insurance premium etc.