Functions of central banks, stock exchanges, commercial banks

Central Bank

A central bank, reserve bank, or monetary authority is a public institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the nation’s monetary base, and usually also prints the national currency, which usually serves as the nation’s legal tender. In Maldives, Maldives Monetary Authority(MMA) is the Central Bank. In UK, it is the Bank of England. The following are the important functions of a Central Bank.

1-Sole right of note issue
The Central Bank in every country, now, has the monopoly note issue. The issue of notes is governed by certain regulation which is enforced by the state.

2-Banker to the state
A Central Bank acts as a banker to the government. It holds cash balances of the government free of interest.

3-Bankers’ bank.
The central bank acts as a banker to the commercial banks.

4-Bankers’ clearing house
The Central Bank acts as a clearing house for the settlement of mutual obligations of different commercial banks. If a difference exists, it is paid by a cheque drawn on the banks accounts carried at the Central Bank.

5-Lender of the last resort
The Central Bank helps the member banks in times of crisis.

6-Financial agent
The Central Banks act as financial agents for the government. It is an agent for the government in purchasing and selling of gold and foreign exchange.

7-Effective monetary policy
The aim of the government is to create employment in the country, resist undue inflation and achieve a favorable balance of payment.

Functions of Stock Exchange

Stock Exchange is the name of the market where instead of goods and services, stocks and shares are traded. Investors can sell or purchase shares, bonds or securities of different companies and corporate bodies. More often these purchases and sales are made through agent or brokers.

Some of the important functions are explained below:
1. Determination of Share Price: The most important function is the determination of share prices for everyday trading. The prices are affected by the forces of demand and supply. It is the place where these forces meet each other to establish price of a share. This price then shows the strength of a company in the market.
2. Development of Capital Market: It is the basis of development of capital market. As you know that capital market has two segment i.e., non-securities market and securities market. It is a developed form of this securities market. Active stock exchange helps in better growth of capital market. It also provides a medium in which different instruments of capital market can be easily traded.
3. Generation of Savings: Stock market induces people to save. It teaches them to save and then to invest savings in right direction. By providing a profitable way of using savings, stock markets increase potential of savings in the economy. Higher savings potentials increases the rate of capital formation in the country. It also helps in the expansion of economy in the long run.
4. Mobilization of Resources: It serves the vital function of resource mobilization. Not only it attracts savings from all classes of society but it also channel these savings in different sectors. So it turn savings into investment. These investments are then used to extract and allocate more and more resources of all kind. Efficient mobilization of resources lead to increase in production and improvement of living standards.
5. Strengthening Industrial Base: It strengthen the industrial base of the country. You are very well aware that industry needs a huge amount of capital. This need is mainly fulfilled by stock exchange. It provides an easy medium by which investment of any amount can be made. The growth of joint stock companies is also possible because of stocks exchange. It is also the place where share prices are quoted and shares and stock are traded.
6. Emergence of New Companies: It plays an important role in emergence of new companies and industries. A company listed on the stock exchange enjoys a higher confidence of public and general investor. So it is in a better position to attract investment and to raise minimum subscription. Thus in the presence of stock exchange new projects can be started relatively easily. It also helps in raising finance for establishing new lines of production and industrial units.
7. Healthy Corporate Structure: It helps in the maintenance of corporate structure of the economy. It is a source of promotion for sound and healthy companies. It has its particular set of rules and regulation which are to be abided by all the listed companies. These rules ensures fair running of the affairs of company. Also companies are required to send their interim and final reports to it, where they are listed. Thus investor can get these reports from stock exchange and study affairs of desired company.
8. Financial Stability: It has a vital role in financial stability. Trends in stock exchange effect all major sectors of the economy. That is why the governing authorities always keep a close eye on the conditions of stock exchange.

Commercial Banks


The main functions of commercial banks are accepting deposits from the public and advancing them loans.

However, besides these functions there are many other functions which these banks perform. All these functions can be divided under the following heads:

1. Accepting deposits

2. Giving loans

3. Overdraft

4. Discounting of Bills of Exchange

5. Investment of Funds

6. Agency Functions

7. Miscellaneous Functions

1. Accepting Deposits:

The most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks.

For example, fixed and low income group people deposit their savings in small amounts from the points of view of security, income and saving promotion. On the other hand, traders and businessmen deposit their savings in the banks for the convenience of payment.

Therefore, keeping the needs and interests of various sections of society, banks formulate various deposit schemes. Generally, there ire three types of deposits which are as follows:

(i) Current Deposits:

The depositors of such deposits can withdraw and deposit money when­ever they desire. Since banks have to keep the deposited amount of such accounts in cash always, they carry either no interest or very low rate of interest. These deposits are called as Demand Deposits be­cause these can be demanded or withdrawn by the depositors at any time they want.

Such deposit ac­counts are highly useful for traders and big business firms because they have to make payments and accept payments many times in a day.

(ii) Fixed Deposits:

These are the deposits which are deposited for a definite period of time. This period is generally not less than one year and, therefore, these are called as long term deposits. These deposits cannot be withdrawn before the expiry of the stipulated time and, therefore, these are also called as time deposits.

These deposits generally carry a higher rate of interest because banks can use these deposits for a definite time without having the fear of being withdrawn.

(iii) Saving Deposits:

In such deposits, money upto a certain limit can be deposited and with­drawn once or twice in a week. On such deposits, the rate of interest is very less. As is evident from the name of such deposits their main objective is to mobilise small savings in the form of deposits. These deposits are generally done by salaried people and the people who have fixed and less income.

2. Giving Loans:

The second important function of commercial banks is to advance loans to its customers. Banks charge interest from the borrowers and this is the main source of their income.

Banks advance loans not only on the basis of the deposits of the public rather they also advance loans on the basis of depositing the money in the accounts of borrowers. In other words, they create loans out of deposits and deposits out of loans. This is called as credit creation by commercial banks.

Modern banks give mostly secured loans for productive purposes. In other words, at the time of advancing loans, they demand proper security or collateral. Generally, the value of security or collateral is equal to the amount of loan. This is done mainly with a view to recover the loan money by selling the security in the event of non-refund of the loan.

At limes, banks give loan on the basis of personal security also. Therefore, such loans are called as unsecured loan. Banks generally give following types of loans and advances:

(i) Cash Credit:

In this type of credit scheme, banks advance loans to its customers on the basis of bonds, inventories and other approved securities. Under this scheme, banks enter into an agreement with its customers to which money can be withdrawn many times during a year. Under this set up banks open accounts of their customers and deposit the loan money. With this type of loan, credit is created.

(iii) Demand loans:

These are such loans that can be recalled on demand by the banks. The entire loan amount is paid in lump sum by crediting it to the loan account of the borrower, and thus entire loan becomes chargeable to interest with immediate effect.

(iv) Short-term loan:

These loans may be given as personal loans, loans to finance working capital or as priority sector advances. These are made against some security and entire loan amount is transferred to the loan account of the borrower.

3. Over-Draft:

Banks advance loans to its customer’s upto a certain amount through over-drafts, if there are no deposits in the current account. For this banks demand a security from the customers and charge very high rate of interest.

4. Discounting of Bills of Exchange:

This is the most prevalent and important method of advancing loans to the traders for short-term purposes. Under this system, banks advance loans to the traders and business firms by discounting their bills. In this way, businessmen get loans on the basis of their bills of exchange before the time of their maturity.

5. Investment of Funds:

The banks invest their surplus funds in three types of securities—Government securities, other approved securities and other securities. Government securities include both, central and state govern­ments, such as treasury bills, national savings certificate etc.

Other securities include securities of state associated bodies like electricity boards, housing boards, debentures of Land Development Banks units of UTI, shares of Regional Rural banks etc.

6. Agency Functions:

Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions. The important functions of these types are as follows:

(i) Banks collect cheques, drafts, bills of exchange and dividends of the shares for their custom­ers.

(ii) Banks make payment for their clients and at times accept the bills of exchange: of their cus­tomers for which payment is made at the fixed time.

(iii) Banks pay insurance premium of their customers. Besides this, they also deposit loan installments, income-tax, interest etc. as per directions.

(iv) Banks purchase and sell securities, shares and debentures on behalf of their customers.

(v) Banks arrange to send money from one place to another for the convenience of their custom­ers.

7. Miscellaneous Functions:

Besides the functions mentioned above, banks perform many other functions of general utility which are as follows:

(i) Banks make arrangement of lockers for the safe custody of valuable assets of their custom­ers such as gold, silver, legal documents etc.

(ii) Banks give reference for their customers.

(iii) Banks collect necessary and useful statistics relating to trade and industry.

(iv) For facilitating foreign trade, banks undertake to sell and purchase foreign exchange.

(v) Banks advise their clients relating to investment decisions as specialist

(vi) Bank does the under-writing of shares and debentures also.

(vii) Banks issue letters of credit.

(viii) During natural calamities, banks are highly useful in mobilizing funds and donations.

(ix) Banks provide loans for consumer durables like Car, Air-conditioner, and Fridge etc.

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