Top 9 ethical functions of central bank-Clearinghouse working and advantages

The activities of the central bank are different from the activities of the commercial banks. Central banks of a country look after the national interest and advantages rather than after the profit.

It is to clarify the banker of government and banker’s bank. It does not deal that is to say with the public deposits or loans and advances to the public.

The functions of the central bank, as mentioned by banking experts, are performed in the following capacities.

In this blog, followings point discussed:

1. Sole right of note issue
2. Banker to the government
3. Banker’s bank
4. Leader of capital market
5. Controller of foreign exchange
6. Custodian of metallic reserve
7. Exchange rate stability
8. Representative of foreign trade
9. Miscellaneous Functions
10. Clearinghouse
11. Working of clearinghouse
12. Advantages of clearinghouse
13. Conclusion
14. FAQ’s

These functions are performed almost by all the central banks of the several countries of the world although there may be variations in the degree of functions.

Source: Wikipedia

1. SOLE RIGHT OF NOTE ISSUE:

In every country certainly, the central bank has the sole right or monopoly of note issue. This jurisdiction to clarify has been delivered to the central bank for:

(a) Uniformity in the notes.

(b) To check undue expansion of notes.

(c) To regulate currency according to its demand.

(d) To make sure that notes issued are the liability of the bank and get full support of the state.

There are following three main methods of note issue.

(i) Fixed fiduciary system

(ii) Proportional reserve system

(iii) Minimum reserve system

2. BANKER TO THE GOVERNMENT:

The functions of the central bank to clarify as banker to the government can be described as follows:

i) Keeping the Deposits:

Financial organization, that is to say, keeps the deposits of the central and provincial governments. It makes payments consequently on behalf of the government. However, it does not pay interest on government deposits.

ii) Advances Loans:

As a fiscal broker, In other words, the financial institution give lend to the government and makes authorization in Treasury Bills and Long-term Government securities.

iii) Foreign Loans:

Central bank makes arrangements however, to get foreign loans on the demand of government.

iv) Transfer of Capital:

Central bank transfers the capital of central and provincial governments from one place to another.

v) Financial Advisor:

Financial institution also notifies the government on economic situations such as controlling inflation or deflation, deprecation or appreciation of the currency and balance of payments etc.

vi) Keeping of Accounts:

Financial organization, that is to say, keeps the accounts of different departments of govt. It does not charge to clarify any fee or commission for said service.

vii) Govt. Securities:

Financial institution is not only the supervisor of government securities, however, also works for their sale and purchase.

3. BANKER’S BANK:

As a banker for the commercial banks, the central bank execute the following functions:

i) Custodian of Cash Reserves:

The commercial banks are required by law to keep reserves equal to a certain percentage of both time and demand deposit with the central bank.

ii) Clearing House:

As a banker’s bank, Therefore, the central bank acts as a clearinghouse for the settlement of mutual claims of commercial banks.

Since the central bank holds reserves of commercial banks, it transfers funds from one bank to the other banks.

To facilitate the clearing of the cheques So, by making entries on the principles of bookkeeping without using cash.

iii) Lender of Last Resort:

Central bank acts as the lender of last resort for the commercial banks.

The central bank gives loan to clarify to the member or scheduled banks in times of tension to rescue their financial structure.

iv) Re-discounting:

The member commercial banks subsequently can re-discount their bills from the central bank in the time of need.

v). Opening of New Bank:

A new bank or a branch of a living bank cannot be recognized without the earlier permission of the central bank.

vi) Advance Policy:

The central bank manages the policies that is to say of prepaid loans for commercial banks and fixed the rate of interest to be charged.

vii) Growth of Banks:

It is the liability of the central bank to clarify to raise the consequence of the banking system on a sound footing.

4. LEADER OF CAPITAL MARKET:

Central bank is considered as the leader or guardian of capital market because it works for its establishment and growth.

It also makes policies and takes decisions to avoid undue expansion or contraction of credit and to stable the credit or money system in the country.

5. CONTROLLER OF FOREIGN EXCHANGE:

Central Bank is responsible as a result of the management of foreign exchange and monetary policy, maintenance of the external value of the home currency. 

Moreover, foreign exchange reserves are also kept with the central bank.

It prepares the balance of payments accounts therefore of the country, and helps the government to keep the balance favourable.

6. CUSTODIAN OF METALLIC RESERVE:

Central bank is a supervisor or custodian certainly of metallic reserves (gold and silver etc.) of its country. It keeps them however with great care and safety.

The metallic reserve of commercial banks and other institutions are also kept with the central bank.

7. EXCHANGE RATE STABILITY:

Central bank fixes the exchange rates consequently of the domestic currency in terms of foreign currencies.

It holds these rates within confine limits in a holding with therefore its liabilities as a member of the International Monetary Fund and tries to bring stability in foreign exchange rates.

8. REPRESENTATIVE OF FOREIGN TRADE:

Central bank be in action therefore as the agent of government in international trade.

Besides, making investment in the international market, it also provides foreign exchange to importers and exporters of the country.

9. MISCELLANEOUS FUNCTIONS:

i) Staff Training:

Central bank not only provides modern training of banking to staff but also establishes training institutes in this regard. (e.g.) So, Institute of Bankers etc.

ii) Growth to Saving:

Central bank makes plans and adopts various methods subsequently to promote the habit of saving among the people of the country.

iii) Industrial & Agricultural Development:

Financial institution extends loans of different kinds however to develop the industrial and agriculture sectors and economic development of the country.

iv) Representation in International Institutions:

Central bank acts as the representative of government So, for International institutions like IMF etc.

v) Membership Fee:

If the government wants to become a member of international institutions, then the central bank pays membership fee (e.g.) SAARC and Security Council certainly etc.

vi) Financial Reports:

The central bank publishes periodical reports, therefore, relating to different aspects of monetary and economic policies.

CLEARINGHOUSE

The central bank provides the services consequently of clearinghouse to commercial banks.

The clearinghouse function therefore was first developed by the Bank of England.

Towards the middle of the nineteenth century that is to say on the idea presented by Mr Irvin, a bank clerk in London.

 DEFINITION OF CLEARING HOUSE:

A clearinghouse is a place therefore where representatives of commercial bank gather to settle their mutual claims Clearinghouse may be defined as under

(G. Thomas)

G. Thomas has defined clearing house as follows:

“Clearinghouse is an organization to clarify that provides guarantee the arrangement of credit facilities in the middle of an appendage”.

(James Philips)

In the words of James Philips

“Clearinghouse is an institution that is to say where banks exchange of cheques deposited with them and settle their balances with each other”.

 WORKING OF CLEARING HOUSE:

Generally, a branch of the bank receives cheques from its customers drawn on other branches of different banks.

A branch wise detail in triplicate in prepared So, for all cheques drawn on different branches of banks.

All cheques drawn on other branches, however, are sent to the main branch of the bank along with two copies of detail.

The representatives of all local commercial banks consequently meet on all the working days in a clearinghouse.

The representative of each bank receives the cheques drawn subsequently upon it and delivers to the representatives of other banks cheques drawn upon them.

The cheques received to clarify from other banks are called outward clearing and cheques delivered to other banks are called “inward clearing.

The net difference of inward clearing and outward clearing that is to say settled by debiting or crediting to the accounts of bank maintained with the central bank or its representative.

ADVANTAGES OF CLEARING HOUSE:

The main advantages of clearing house are as follows:

Convenient:

 When the commercial banks settle their mutual through a clearinghouse, it is time-saving and convenient for them to settle their claims at one place.

Economy in cash: 

The clearinghouse economizes the use of cash by banks because their claims are settled by debiting or crediting their accounts by the central bank.

The claims are settled however without making payments in cash.

Safety: 

The clearing house provides safety in settlement of claims because there is no involvement of cash.

Credit facility:

The clearinghouse reduces to clarify the withdrawals of cash. The commercial banks are not required consequently to hold large cash reserves.

They can lend more money subsequently to the business community. Hence clearing house increases the credit facilities in the country.

Liquidity position:

The clearinghouse function keeps the central bank fully informed about the liquidity position of the commercial banks.

Co-operation: 

If there are financial difficulties, the member banks may co-operate with each other to overcome the financial difficulties.

The receiving bank can delay the payment to overcome financial difficulties of paying bank.

Early payments:

 The clearinghouse function provides the chances of the early settlement of mutual claims of commercial banks.

Prevents undesirable competition:

The clearinghouse function extends co-operation among banks which helps to prevent undesirable competition.

Use of cheque: 

The clearinghouse function enables the banks to make early payments of outstation cheques.

This facility of early payment has increased the use of cheque in the country.

Provides solution of problems: 

The representatives of commercial banks meet daily at the clearinghouse to settle their claims.

This provides an opportunity to discuss and solve the various problems faced by bankers.

Conclusion:

Discuss all the functions of the central bank in the above section with proper detail. In conclusion, the functions of the central bank and the clearinghouse provide the facilities to other banks to solve transaction issues.

FAQ