All About Central Bank and Commercial Banks in India

Definition of Central Bank

Central Bank is the supreme financial institution that regulates the banking and monetary system of the country. It is formed to bring monetary stability, issue notes and maintain the value of a country’s currency in the international market. It administers the currency and credit system of the nation.

In India, the Reserve Bank of India plays the role of a central bank, which came into existence, after passing an act in parliament in 1934. The bank is headquartered in Mumbai, Maharashtra. The following are the main functions of the Central Bank

• It is authorized to issue currency notes except coins and notes of small magnitude.
• It has the power to control, direct and supervise the commercial banks. It also helps them at the time of need.
• It employs various measures to control the credit operations of the commercial banks.
• It is the banker and advisor to the government of the country.
• It acts as a manager of foreign exchange reserves.
• It collects and publishes the information relating to banking and financial sector.
• It oversees the credit and monetary policy of the nation.

Definition of Commercial Bank

The entities that provide banking and financial services to a large number of people are known as Commercial Banks. They act as a mediator between the borrowers and savers. The Commercial Banks receive deposits from the general public and lends it on high interest to the individuals and organizations. In this way, the mobilization of savings takes place, and the economic cycle goes on smoothly.

In earlier times, people used to deposit money in post offices for saving purposes, when the requirement of the banking system was felt. The people want an establishment where they can deposit their savings and withdraw it at the time of need. At present, there are more than 600 commercial banks in India, which include public sector banks, private sector banks, scheduled banks, non-scheduled banks, nationalized banks, etc. The essential functions of a Commercial Bank are:

• It accepts deposits from the general public, firms, institutions and organization. Further, it gives the facility to withdraw money on demand. Banks pay interest on deposits at various rates on different deposits.
• It lends money to public, institutions, and organization in the form of long term and short term loans for a particular period and charges interest on the amount lent. Moreover, it provides overdraft and cash credit facilities to the customer.
• It performs agency functions like collections of bills of exchange and promissory notes, trading of shares and debentures, payment to third parties on standing instructions of the customer, etc.
• It provides the facility of safe keeping of valuables like jewelry and documents.
• It collects, transfers and makes payment of funds on behalf of the customer.
• It provides the facility of ATM card, Debit Card, Credit Card, Cheques, etc., to its account holders.