Central Bank

A central bank or reserve bank, or monetary authority is an institution

that manages a state's currency, money supply, and interest rates.

The bank in any country to which has been entrusted the duty of
regulating the volume of currency and credit in that country.

A Central bank is a bank which controls credit.

 Contd…..
NEPAL RASTRA BANK is the central bank of Nepal, established in 1956
under the Nepal Rastra Bank Act 1955 is the monetary, regulatory and
supervisory authority of banks and financial institutions.

Now it is operating under Nepal Rastra Bank Act 2002 .

Key objectives of the Bank are to achieve price and balance of payments
stability, manage liquidity and ensure financial stability, develop a sound
payments system, and promote financial services
 Objectives of Central Bank
a) Regulating economic activities by facilitating flow of funds
b) Protecting the national interest –provide cushion to depositors
c) Maintaining the health of nation’s financial system- safeguard the interest of nation
by discouraging unhealthy economic activities.
d) Retain balanced growth, stabilize the price level and control inflation.
e) Correct balance of payment to minimize fiscal deficit and to determine foreign
exchange rate.
f) To maintain inflation in proper level.
g) Avoid Institution failures- minimize the effect of financial panics in the nation’s
financial system.
 Principles of Central Bank
National Welfare : Not with profit making objective

Monetary and Fiscal Stability : Central Bank is empowered by law for control and
stability of the monetary and financial situation of the country.

Free from Political effect : It should not be affected by Politics.

Free from Competition : No competition with any other financial institution

 Function of Central Bank

Note issuance : The right to issue note is granted only to the central bank of that country.

Government’s Bank : It act as a Banker, Agent and Advisor to the government.

As a Agent, it accept loans and manage public debts on behalf of the government. As a
financial advisor, it provides useful advice to the government on important economic
issues and different financial problems .
As a financial advisor to the government, it gives advice to the government on economic,
monetary, financial and fiscal matters such as deficit financing, trade policy, foreign
exchange policy etc.

Bank of the Banks : It acts as Banker’s Bank . Some of the important factors which proves
this statement are:
i) Every commercial bank has to maintain a definite percentage of its liability ( domestic
deposit ) with central bank which is known as CRR. ( Cash Reserve Ratio)
 Contd….
As the supreme bank of the country and the banker’s bank, the Central
Bank acts as the lender of the last resort.
Lender of last resort means if commercial banks ( worst case scenario)
are not able to meet their financial requirements from any other
sources ,then they can approach to central bank for financial
accommodation.
It provides financial accommodation to the commercial banks by
rediscounting their eligible financial securities.
 Holder of foreign Exchange Reserve

It acts as a custodian of country’s foreign exchange reserve. This

function helps central bank to overcome the balance of payment
difficulties and to maintain stability in the exchange rates.
 Credit Control

It is most important function of Central Bank.

If credit creation is excessive then it leads to inflation. On the other side,

if there is deficiency in credit creation, economy experience stagnation.
Therefore, Central Bank, through certain credit control measures, bring
out stability in credit.
 Economic Development
In the underdeveloped or developing countries like us, the central bank,
besides performing its regular duties, also focus on development of
capital and money market .
 Licensing, Regulation and Supervision

It perform the function of regulatory and supervisory authority of bank

and financial institution. It provides license to the banks and financial
institution too.
 Formulation & Implementation of Monetary Policy
A nation’s economic policy depends on two major policies.
a) Fiscal Policy
b) Monetary Policy

Central Bank formulate and Implement monetary policy.

Monetary’s policy’s objective may be price stability, foreign exchange
stability, financial sector stability, economic growth, employment and other
development objective set by government.
 Others
It maintains relationship with international institutions such as IMF ,
World Bank etc.

It collects various types of statistics providing information about current

state of economy.

It concludes surveys; seminars etc and publish reports on other matters.

It promotes the overall banking system of country . For eg. issuing new
directives as well as update in existing directives as per needs of
economy.
It takeover bankrupted financial institution as well as others institution
which is technically not sound for recovery purpose.
Difference between Central Bank and Commercial Bank
a)The Central Bank is the apex monetary institution which has been specially
empowered to exercise control over the banking system of the country. The
Commercial bank is a unit of the banking system.

b)Profit maximization is the main objective of commercial bank whereas to

maintain financial stability in economy is the main objective of Central Bank.
c)The central bank is state owned institution ,while the commercial banks are
normally privately owned institution.
d)Central Bank do not compete with commercial banks but there is tough
competition between commercial banks.
e)Central bank has monopoly of issuing notes but commercial banks have no
such rights.
 Contd…..
f) The central bank is the custodian of the foreign exchange reserve of
the country. The commercial banks are only the dealers in foreign
exchange.
g) The central bank act as as the banker to the government ,the
commercial banker to the general public.