The functions of Central bank

The main function of a central bank is to act as governor of the machinery of credit in order to secure stability of prices. It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit. In India RBI have two departments, namely. Issue department and Banking department.

Main functions:

1. Issue of Currency:

The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money.

2. Banker to Government:

Central bank functions as a banker to the government—both central and state governments. It carries out all banking business of the government.

3. Banker’s Bank and Supervisor:

There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank.

4. Controller of Credit and Money Supply:

Central bank controls credit and money supply through its monetary policy which consists of two parts—currency and credit.

5. Exchange Control:

Another duty of a central bank is to see that the external value of currency is maintained.

6. Lender of Last Resort:

When commercial banks have exhausted all resources to supplement their funds at times of liquidity crisis, they approach central bank as a last resort.

7. Custodian of Foreign Exchange or Balances:

It has been mentioned above that a central bank is the custodian of foreign exchange reserves and nation’s gold.

8. Clearing House Function:

Banks receive cheques drawn on the other banks from their customers which they have to realise from drawee banks.

9. Collection and Publication of Data:

It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy.

The functions of Commercial bank

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. 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.

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.

3. Overdraft. 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.

6. Agency Functions. Banks function in the form of agents and representatives of their customers. Customers give their consent for performing such functions.

7. Miscellaneous Functions. Besides the functions mentioned above, banks perform many other functions of general utility

Fiscal policy: essence and main instruments

Fiscal policy is a policy concerning the receipts and expenditures of the government. It refers to the policy related to the budget of the government. It operates through changes in the government expenditures, taxation, and public borrowings.
Fiscal policy is used as a balancing device in the development of an economy. The modern fiscal policy is a technique to achieve and regulate full employment by manipulating public expenditure and revenue in such a way as to maintain equilibrium between effective demand and supply services at a particular time.        There are mainly four instruments or constituents of the fiscal policy:

Budget, government expenditure, taxation, public debt and deficit financing.

Budget

A budget is an estimate of government expenditures and revenues for a fiscal year, usually presented to the parliament by the finance minister. In other words, the estimated statements of the government revenues and expenditures are called budget.

2. Government Expenditure. It includes:

· government spending on the purchase of goods and services

· Payment of wages and salaries of government servants

· Public investment

· Transfer payments

Taxation

Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer.

Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes.

4. Public Debt
Public debt is the debt which the government owes to its subject or to the nationals of other countries. The government can borrow from individuals, business enterprises and banks. It can borrow from within the country and from outside the country. The main objectives of government borrowings are to meet the budgetary deficit, to finance a war, to finance development plans and to fight depression.