Central Bank - Functions and Credit Control

troduction Central Bank is an entity that controls the monetary system of a nation. The objectives of central bank are: to maintain external and internal value of domestic currency in relation to foreign currency, to ensure price stability in the economy, etc. The various Functions of Central Bank are:- Issues Currency Notes Banker to the Government Banker to the Banks Lender of the Last Resort Custodian of Foreign Exchange Reserve Clearing House Function Collection and Publication of Data Controller of Credit and Money Supply and Promotional and Developmental Functions Reserve Bank of India (RBI) is the central bank of India. RBI controls credit in the Indian economy through its monetary policy. Monetary Policy is a policy by which the monetary authority (central bank) of the country controls the supply of money and availability of credit and rate of interest in the economy to achieve economic stability. The two instruments of monetary policy are quantitative instruments also known as quantitative methods of credit control and qualitative instruments also known as qualitative methods of credit control. Quantitative Instruments of Credit Control includes Bank Rate, Open Market Operations, Cash Reserve Ratio and Statutory Liquidity Ratio. Qualitative Instruments of Credit Control includes Margin Requirements of Loan, Credit Rationing, Direct Action and Moral Suasion.

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  • Q1

    The apex Institution of banking is

    Marks:1
    Answer:

    Central Bank.

    Explanation:

    Central Bank is the apex or the main body for banking. It regulates the functioning of all other banks. In India the central bank is Reserve Bank of India.

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  • Q2

    The rate at which RBI lends short term funds to banks is called

    Marks:1
    Answer:

    Repo rate.

    Explanation:

    At present according to Feb. 2009 in India the Repo rate is 5.5% and the Reserve Repo Rate is 4%.

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  • Q3

    What do you mean by Cash Reserve Ratio(CRR)?

    Marks:4
    Answer:

    Every commercial bank, under law, has to deposit with Central bank a minimum percentage of its demand and its deposits. This percentage is called as CRR. A high CRR means more reserves and less loans. By changing CRR, Central bank controls the lending capacity and credit availability of banks. Recently, RBI has raised CRR from 5.5% to 6% w.e.f. March 3, 2007 in order to control inflation. In case of deflation, RBI decreases the CRR.

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  • Q4

    Name the India’s Central Bank.

    Marks:1
    Answer:

    India’s Central Bank is the Reserve Bank of India.

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  • Q5

    List the functions of a Central Bank.

    Marks:3
    Answer:

    The functions of Central Bank are as follows:

    (i) Issuing of currency

    (ii) Banker to government

    (iii) Banker’s bank and supervisor

    (iv) Controller of credit and money supply

    (v) Custodian of foreign exchange

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