Q.General public are not allowed to open accounts in the central bank. Does it mean that the central bank does not perform any commercial banking activity? Explain.
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Start your 14-day free trial to unlock the full solution →The central bank does do banking business, but its customers are the government and the commercial banks — not the general public.
It is true that the general public is not allowed to open accounts or keep deposits directly with the central bank (the RBI). But this does NOT mean that the central bank performs no commercial (ordinary) banking activity at all. It performs the normal banking functions — accepting deposits, making payments, giving loans — but only for a special class of customers: the government and the commercial banks, not the general public.
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Banker to the Government:
The central bank acts as the banker, agent and adviser to the central and state governments. It keeps the government's accounts, receives deposits on its behalf, makes payments for it, gives it short-term loans (ways-and-means advances), and manages the public debt. In this role it performs exactly the kind of banking activity a commercial bank performs for its ordinary customers — but for the government.
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Bankers' Bank (Banker to the Banks):
Commercial banks keep a part of their cash reserves as deposits with the central bank (CRR), so the central bank accepts their deposits, acts as the custodian of their reserves, provides them with clearing and remittance facilities, and lends to them (as lender of last resort / through rediscounting). So it performs banking functions for the commercial banks.
Why it does not deal with the public: …
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