The central bank and commercial banks have their distinct identities and functions. The central bank, through its function of the lender of the last resort, acts as an active agent of the government in implementing its monetary policies. In developed countries, the efficient carrying out of this function is easy. Also learned, Economic and Market Value Added, The Relationship between Central and Commercial Banks!

Learn, Explain The Relationship between Central and Commercial Banks! 

The following concept of relationship below are;

Central Banks:

A central bank, reserve bank, or monetary authority is an 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 monetary base in the state, and usually also prints the national currency, which usually serves as the state’s legal tender.

Central banks also act as a “lender of last resort” to the banking sector during times of financial crisis. Most central banks usually also have supervisory and regulatory powers to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by member banks.

Commercial Banks:

A commercial bank is an institution that provides services such as accepting deposits, providing business loans, and offering basic investment products. The commercial bank can also refer to a bank, or a division of a large bank, which more specifically deals with deposit and loan services provided to corporations or large/middle-sized business – as opposed to individual members of the public/small business.

In developing economies, however, this is not so simple. Here a case is often made for entry of the central bank in some selected fields to promote the development of the economy; besides ensuring the growth of a sound banking structure to cope with the increasing needs of credit. Commercial bankers take this as an encroachment on their field.

The Relationship between the commercial banks and the central banks:

The relationship between the commercial banks and the central bank has to be based on reciprocity. The commercial banks should conform to the spirit of central bank directives rather than letters. On the other side, the central bank should invariably satisfy the genuine needs of the commercial banks in times of stresses and strains. A moral code of conduct between the two will have to be evolved, accepted and followed.

They argue that the major part of the Central Bank’s funds comprise the reserves of the commercial banks meant for safeguarding their safety (liquidity). It would be immoral on the part of the central bank to compete in business with the commercial banks with their money. In view of the co-operation that the central bank often seeks from commercial banks for carrying out its policies, the central bank should not invite hostility from them by giving them unjust competition through its special privileges as the bankers’ bank and the banker of the government.

In spite of these arguments, opinion has gone in favor of the undertaking of some commercial business by the central bank, especially in underdeveloped economies. A small amount of business can hardly affect the liquidity position of the ‘creator of liquidity’. It is not at all necessary that the central bank uses the commercial banks’ funds for this. It can set up a separate department for commercial business and create resources also.

In fact, it may organize a special agent bank as its favored child for doing the arduous business necessary for economic development often avoided by commercial banks. Further, if the central bank feels that the steering wheel of credit control in its banks is loose and not functioning satisfactory, it may gain an edge of maneuverability by keeping in touch with the market through a limited amount of business.

Besides, in an agriculturally depressed economy like India, the central bank may take up the onus of developing a bill market, granting direct loans, or discounting good bills of exchange. As regards direct loans, it may be a bit difficult to democrat clearly the central bank’s field vis-a-vis that of the commercial banks.

The difficulty is removed if the central bank while doing ordinary commercial business keeps in mind that in its operations, the public interest and not profit-earning motive, prevails; what it can get done through commercial banks it never undertakes to do itself.

The various quantitative and qualitative instruments of credit control should be judiciously used by the central bank. No doubt, the bank has the drastic weapons of reserve ratio requirements, open market operations or changes in the bank rate, etc. but none of them is fool-proof.

After all, it is bank official on the spot who can judge between the credits asked for socially desirable productive purposes or credit being taken in the name of bonafide purposes, but to be used for some anti-social actions. Unless the commercial bank and the central bank provide willing co-operation, the one will be weakened and the other will be frustrated. This is why moral persuasion must be preferred now to direct action.

  1. An impressive share! I’ve just forwarded this onto a coworker who had
    been conducting a little homework on this. And he actually ordered me lunch simply
    because I found it for him… lol. So let me reword this….
    Thank YOU for the meal!! But yeah, thanks for spending some time to talk about this topic here on your website.

  2. Wonderful blog! I found it while surfing around on Yahoo News.

    Do you have any tips on how to get listed in Yahoo News?
    I’ve been trying for a while but I never seem to get there!

  3. Howdy! I know this is kinda off topic but I was wondering if you knew where I could get a captcha plugin for my
    comment form? I’m using the same blog platform as yours
    and I’m having difficulty finding one? Thanks a lot!

  4. I don’t even know how I ended up right here, however I
    assumed this submit used to be good. I don’t realize who you’re however definitely you are going to a famous blogger in case you aren’t already.

  5. My programmer is trying to persuade me to move to .net from PHP.
    I have always disliked the idea because of the expenses.
    But he’s tryiong none the less. I’ve been using WordPress on numerous
    websites for about a year and am anxious about switching to another
    platform. I have heard excellent things about

    Is there a way I can transfer all my wordpress content into it?
    Any help would be really appreciated!

  6. Hey I know this is off topic but I was wondering if you knew of any widgets I could
    add to my blog that automatically tweet my newest twitter updates.

    I’ve been looking for a plug-in like this for quite some time and was hoping maybe you would have some experience with something like this.
    Please let me know if you run into anything. I truly enjoy reading your blog and I look
    forward to your new updates.

  7. Wе’re a group of volunteers and starting ɑ nnew scheme in our commᥙnity.Your website offered us withh useful information too
    wirk on. Yoߋu have done a formidaƄle job and our entire group shall be grateful tto you.

  8. you are really a good webmaster. The web site loading speed is amazing. It seems that you are doing any unique trick. Also, The contents are masterwork. you’ve done a fantastic job on this topic!

  9. I really appreciate this post. I¡¦ve been looking all over for this! Thank goodness I found it on Bing. You have made my day! Thank you again

  10. Your style is very unique compared to other folks
    I have read stuff from. I appreciate you for posting when you
    have the opportunity, Guess I’ll just book mark this

  11. Hi, i think that i saw you visited my web site thus i came to “return the favor”.I am trying to find things to improve my website!I suppose its ok to use a few of your ideas!!

Leave a Comments/Reply

You May Also Like