Economics 12 Notes for Economics Notes

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Role of Central Bank with special reference to the Nepal Rastra Bank

Role of Central Bank with special reference to the Nepal Rastra Bank:

Central bank is the supreme monetary institution, which is remained at the apex body of the monetary and banking structure of a country. It is the leader of money market and it controls, regulates and supervises the activities of the banks and financial institutions. A central bank performs many important and essential functions which are explained as follows:

  1. Monopoly of note issue: The central bank has monopoly power of note issue in every country. The granting of monopoly right of issue makes it easier to maintain uniformity in money and control the quantity of money. It is also easier for the government to control and make supervision of note issuing function. The uniformity in notes ensures people’s confidence in notes. In Nepal, Nepal Rastrya Bank had started to issue notes since 2016 Phalgun. The notes are issued against the fixed % reserve of gold, silver and foreign currency.
  2. Banker, adviser and agent of government: The central bank acts as a banker, agent and adviser of the government. Central bank keeps the banking accounts of government departments, boards and performs the same function as a commercial bank performs for customers. It keeps the deposits from the government and undertakes the collection of cheques and drafts deposited in the government account. It also provides short-term loans such as overdraft to the government. It also provides foreign exchange facilities to the government. As a financial adviser it gives advice to the government in economic, monetary, financial and fiscal policy such as devaluation, trade policy, foreign exchange policy, etc. As an agent of government manage the public debt and issue the new loan and treasury bill on behalf of the government.
  3. Banker’s Bank: The central bank works as the banker of the other banks. Central bank holds the right of supervision, control on other banks. Acting as the custodian of the cash reserve of commercial banks, the central bank maintains the cash reserve of the commercial banks. Every commercial bank of the country has to keep a certain percentage of the cash balance as deposits with the central bank. Such reserve can be used by commercial banks to meet the emergencies.
  4. Lender of last resort: As a lender of the last resort, in time of crisis, the central bank provides financial helps to the commercial banks by rediscounting their bills or by providing loans against the short-term securities.
  5. Clearing house function: The central bank is the clearing agent of the transactions between the different banks. Since, all the banks have their account with central bank; it makes debit in one bank’s account and credit in other bank’s account.
  6. Control of credit: The credit should be controlled to maintain the price stability. In order to control the credit, the central bank may use various tools such as bank rate policy, open market operation, change in reserve ratio and selective methods, etc.
  7. Maintenance of exchange rate: Central bank has right to regulate and control the foreign exchange rate. Central bank tries to maintain the stability in value of domestic currency. To maintain the stable exchange rate, central bank is always prepared to buy and sell foreign currency.
  8. Development function: There are various development functions of central bank, which are as follows:
    • Development of banks: The NBR helps in the development of banks and non-banking financial institutions. It encourages banks to open branches in remote areas by providing compensation and interest free loan.
    • Special program: The programs like priority sector credit program, cottage and small industries projects, micro-credit for women have been launched with the initiative of NRB.
    • Publicity: Central bank/NRB has been regularly publishing reports, journals and bulletins related to the economic activities.
    • Relationship with international agencies: It establishes friendly relationship with international financial institutions such as IMF, WB, ADB, etc.
    • Economic study and research: Central bank conducts several research works and economic survey in specific economic issues. It also provides necessary information for plan formulation.

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