OMTEX CLASSES: Central Bank is called as the bankers’ bank.

Central Bank is called as the bankers’ bank.

Yes I agree with this statement


Central Bank as Bankers' Bank -The Central Bank functions as a leader and coordinator of commercial banks in the country. In this capacity, the Central Bank performs the following functions in relation to commercial banks in the country:

a)      The Central Bank acts as a Custodian of Cash Reserves of commercial banks in the country Every commercial bank keeps certain percentage of its cash with the Central Bank of the country. At present keeping a certain percent of cash reserve as a deposit with the Central Bank, is legally made compulsory. This enables the Central Bank. 1) To have control over the total amount of credit creation by commercial banks in the country and thus on the total quantity of money in circulation. 2} By varying, the legal minimum cash reserve which every commercial bank must keep with the Central Bank and which is not available to commercial banks as basis of credit creation, the Central Bank can manipulate the quantity of money, that is in circulation in the economy according to the policy it has formulated.

b)      The Central Bank acts as a "Clearing House"
Since all commercial banks keep deposit accounts with the Central Bank, the Central Bank is in a position to act as clearing house for commercial banks.
Take an illustration. There is not one commercial bank in the country but there are several commercial banks. Customers of Bank 'A' may draw cheques in favour of persons who have accounts with commercial Bank `B' and customers with accounts in bank 'B' may draw cheques in favour of persons who have accounts in commercial bank 'N. Let us suppose that in one month as a result of above transactions bank 'A' owes ` 50 lakhs to bank 'B' and bank 'B' owes ` 40 lakhs to bank 'A'. Now bank 'A' draws a cheque in favour of bank 'B' for` 10 lakhs only on the central bank of the country, where all commercial banks have their accounts.
Bank 'A's account is debited by ` 10 lakhs and bank 'B's account is credited by ` 10 lakhs. Thus the clearing house system' which becomes possible because all commercial banks keep their accounts with the central bank of the country, economizes use of cash and facilitates adjustment of dues between commercial banks by the Central Bank, with convenience to all commercial banks.

c)       The Central Bank advices commercial banks Advices them if their activities are harmful to commercial banking and provides accommodation by lending funds in case of difficulties.

d)      Lender of the last resort:
The commercial banks operate on the basis of low cash reserve system. If there is a great demand for cash by the depositors, even a well managed commercial bank can run into difficulty. This is because, with low cash reserves, it will not be able to meet a sudden and large demand for cash. The Central Bank comes to their rescue at such times. It is the ultimate source of financial assistance to commercial banks. Just as people go to commercial banks when they want loans, commercial banks go to the Central Bank of the country in times of their financial difficulties. Thus, `the lender of the last resort' function of the Central
Bank helps to control panic and infuses confidence among the banks as well as the public. Hence, during the financial difficulties or crisis, commercial banks can always depend upon the Central Bank for the required assistance.