Banking and Insurance · Ch 2 — Central Banking
Meaning of a Central Bank
Meaning of a Central Bank
A central bank is the apex (topmost) financial institution of a country that is responsible for controlling, regulating, and supervising the entire banking and monetary system, and for managing the currency, money supply, and credit of the nation in the public interest.
Unlike a commercial bank, a central bank does not aim to earn profit and does not ordinarily accept deposits from, or lend to, the general public. Its "customers" are the government and the other banks. It occupies a unique position because it acts as the leader, guardian, and controller of the whole banking structure.
Key features of a central bank:
- It is at the apex of the country's banking and monetary system.
- It enjoys the sole right to issue currency notes (except the smallest coins and one-rupee notes, which in India are issued by the Government).
- It is not a profit-seeking institution; it works for the welfare of the economy.
- It does not compete with commercial banks; instead it guides and controls them.
- It acts as banker to the government and banker to the banks.
- It is usually owned or fully controlled by the government (the RBI was nationalised in 1949).
Central bank versus commercial bank — the core difference:
| Basis | Central Bank (RBI) | Commercial Bank |
|---|---|---|
| Position | Apex/topmost bank | An ordinary bank in the system |
| Ownership | Owned/controlled by government | May be public or private |
| Objective | Public welfare, monetary stability | To earn profit |
| Note issue | Has the sole right to issue notes | Cannot issue currency |
| Dealings | With government and banks | With the general public |