Note on Function of Central Bank and Commercial Bank

  • Note
  • Things to remember

FUNCTIONSOF CENTRAL BANK

  1. Issue of notes and coins
    The main function of a central bank is to issue notes and coins. Bank issues the notes under the security of gold, silver, foreign currency and government. Only central bank is allowed to issue notes and coins.

  2. Banker of the bank
    Central bank performs as the bank of all other banks. Central bank accepts and lends the money to another commercial, development, and another bank, provides rules, regulations and direction to another bank.

  3. Bank of Government
    Central bank performs the role as a bank of government. Every government organizations deposit their money in the name of their own organization, a department in the central bank.

  4. Controller of foreign exchange
    Central bank conserves the foreign currency received from the different nations in its fund and control its flow for appropriate uses.

  5. Government’s agent and adviser
    The central bank provides the budget review report to the Government of Nepal each year on the economic and financial matters. The bank is said as a financial agent and the advisor of the Nepal government. It provides the advice while preparing the annual budget .

  6. Controller of credit and money supply
    A commercial bank is profit motivate business. So, it lends money to a customer with profit gaining motive as interest and if the bank faces the problem of inflation,then central bank controls the inflation by several monetary methods.

  7. Authority of central clearance
    Interbank transaction has become easier through the central bank's clearing house mechanism as commercial bank keeps their cash reserve in the central bank.

  8. Lender of the last resort
    The Central bank is said as lender of last resort. It provides the loan to other bank adding some interest rate, called the discount rate.

FUNCTIONOF COMMERCIAL BANK

source:www.slideshare.net

The function of commercial banks can be divided into two categories as Primary function and Secondary function.

Primary Function

Primary function of commercial bank are as follows:

  • Accept money as deposit

The main function of a commercial bank is to accept the deposit of public as a saving and mobilize those amount. There is various type of deposit that bank receives, they are as follow:

  1. Current deposit
    Current deposit is such deposit where the interest rate is zero is the amount deposited in this account is repayable on demand of owner without any restriction. It is also called demand deposit. Such deposit can be withdrawn by the owner at any time by cheques.

  2. Saving deposit
    Saving deposit is an account where an individual saves their some income for the future. Such type of account can be open with or without the facility of the chequebook. There is a restriction on the withdrawals in such type of account. In such types of account instead of money we can also deposit cheques, draft, dividend, etc.

  3. Fixed deposit
    Fixed deposit is such type of deposit where the fixed maturity period is mention on public deposit. The public can withdraw amount only after the maturity of their deposit during depositing it. The interest on such deposit is high and the rate allowed on it is governed by rules laid down by the Nepal Rastra Bank.
  • Lending money as loan
    source:banking.about.com
    source:banking.about.com

The second important function of the commercial bank is to lend money to public in their need. The amount collected from the deposit is just not stored in total as liquid assets they invest it. They provide to public as a loan with high-interest rate than in deposit, customers are given loan as a pledge.

  1. Cash credit
    Cash credit is generally granted on a bond of credit or certain other securities. It is a popular method of lending money in a country Nepal. Bank agrees to lend money with certain limitation and interest rate.

  2. Overdraft
    Overdraft facility is similar to cash credit. Overdraft facility is an agreement with a bank of an account holder where the account holder can withdraw a specified amount over and above the credit balance in his/her account for a short period of time. The interest rate on overdraft is higher than that of a loan.

  3. Term loans
    Term loans are basically medium or long term loan. Such type of loan are granted for more than a year i.e. the loan are to be repaid over a period of 5 years and maximum up to 15 years. These loans are secured against mortgage of land, property, building, plant and machinery and other securities. The interest rate on such loan is quite high.

  4. Discounting of Bills
    Apart from the granting loans commercial bank also grant financial assistance to a customer by discounting bills of exchange. Bank purchase the bills at face value minus interest at the current rate of interest for the period of the bill. (Economics II)

Secondary Function

Besides the primary functions of accepting and lending, bank performs a number of other functions which can be categorized under secondary function.

  • Foreign Currency Transaction

Commercial bank not only accepts money but also accept the currency. Currency is directly not accepted by the public in the markets, so the commercial bank accepts and exchanges it.

  • Remittance of money

A commercial bank does the work of remitting the money that means transferring money from place to place through travel cheques, drafts computerized network, etc. This method helps from money being misplaced.

  • Credit Creation

Commercial bank issue different types of credit letters such as a bill of exchange, letter of the share, bond, etc. Such letter acceptance helps national and international business.

  • Work as Agent

The commercial is an agent to the public because it does an important task as the collection of interest on capital, the sale of share by company, etc. They receive a commission from the general public and organization for such type of commercial services.

  • Investment in Different Sector

Commercial bank does also investment in different sectors likewise in organization, project, industry, etc.

(Karna, Khanal, and Chaulagain)(Khanal, Khatiwada, and Thapa)(Jha, Bhusal, and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

  • Function of central bank
  1. Issue of notes and coins
  2. Banker of the bank
  3. Controller of foreign exchange
  4. Government’s agent and adviser
  5. Controller of credit and money supply
  6. Authority of central clearance
  7. Lender of the last resort
  • Function of commercial bank

- Primary function

  • Accept money as deposit
  • Lending money as loan

- Secondary function

  • Foreign Currency Transaction
  • Remittance of money
  • Credit Creation
  • Work as Agent
  • Investment in Different Sector

 The second important function of the commercial bank is to lend money to public in their need.

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