Central Bank and its Functions

According to Kent, “A central bank may be defined as an institution

which is charged with the responsibility of managing the expansion and
contraction of volume of money in the interest of general public welfare.”
All countries have a central bank which is fully owned by the government. The
main function of central bank is to issue notes and coins and to implement
monetary policy.
Nepal Rastra Bank (NRB), Reserve Bank of India, Bank of England, Federal Reserve
Bank, etc. are examples of central bank.
Central bank is also called bank of the government. It is also called bank of banks.
It is also called lender of last resort as it provides loans to other banks in times of
crisis.
Functions of Central Bank
Nepal Rastra Bank is the central bank of Nepal. It was established as the central
bank on April 26, 1956 (2013B.S.) under the NRB Act 2012. The function of central
bank can be explained as follows:
1. Issuing currency: The central bank has the monopoly right to issue all the
currency notes and coins. The currency issued by the central bank has legal
tender and must be accepted by everyone inside the country as a payment
for goods and services. The rationale behind entrusting to the central bank
this monopoly right over currency issue is to maintain public confidence in
notes and coins and to bring uniformity in the circulation of currency notes
and coins.
2. Formulating and implementing the monetary and foreign exchange policies:
Formulating and implementing the monetary and foreign exchange policies is
a prime duty of the central bank. The central bank through its monetary
policy tries to maintain price stability, interest rate stability, exchange rate
stability, favorable balance of payments and to achieve higher economic
growth.
3. Bank of the government: The central bank works as a banker agent and
advisor to the government. As a banker, the central bank provides all banking
services to the government. As an agent, the central bank collects various
payments on the behalf of the government, manage public debt for
government and also transfer government funds. As an adviser, the central
bank gives valuable suggestions to government about various economic
issues.
4. Bank of banks: As a bank of banks, the central bank keeps certain deposits of
the commercial banks, provides loans and other facilities to the commercial
banks in times of crisis, settle inter-bank transactions and gives permission to
open new bank or new branch. Central bank also inspect, monitor, supervise
and regulate all other banks in the country for economic and financial
stability.
5. Custodian of valuable metals and foreign currencies: The central bank is the
custodian of the reserve of valuable metals like gold and silver and foreign
currencies. 6. Development functions: The development function of central bank include:
Development of banks and their branches throughout the country.
- Development of money and capital market.
- Licensing, regulating and supervising banks and other financial institutions.
- Maintaining warm relations with international financial institutions like IMF,
WB, ADB, etc.
- Organizing training programs for the banking staffs.
- Conduct research and publishing reports, and statistics on economic and
financial matters.