Page 47 - Office Practice and Accounting 10

nation. All other banks in the country are bound either by law or by convention
to keep a certain proportion of their total deposits as reserve in central bank.
They also keep their spare cash in the central bank from which they can draw
when needed. The central bank provides the loan to them as per the necessity
and also provides the technical and economic advice in need. All types of banks
must follow the instruction given by central bank regarding interest rates,
deposits, loans, agency services, etc. This is how the central bank serves as a
banker of banks.
3. It acts as the banker to the government :
Another important function of central bank is to act as the banker to the
government. All the balances of the government are kept with the central bank.
On these balances the central bank pays no interest. The central bank receives
and makes all payments on behalf of the government. The central banks is
required to lend money to the government when it is called upon to do so.
Besides these, it provides foreign exchange resources to the government for
paying external debt and purchasing foreign goods or making other payments.
It buys and sells the government securities. It also acts as a financial advisor of
the government on economic, monetary, trade policy, foreign exchange policy,
etc. In fact, the central bank is the fiscal agent of the government.
4. It controls credit :
The most important function of the central bank is to control the credit creation
power of commercial banks in order to control inflationary and deflationary
pressure within the economy. For this purpose, it adopts quantitative and
qualitative method. Quantitative methods aim at controlling the cost and
quantity of credit by adopting bank rate policy, open market operations and by
variations in reserve ratio of commercial banks. Quantitative methods control
the use of direction of credit. These involve selective credit control and direct
actions.
5. It manages the exchange rate :
Central bank fixes the exchange rate of domestic currency in terms of foreign
currency. It also manages exchange control operations by supplying foreign
currencies to importers and persons visiting foreign countries in keeping with
the rules laid down by the government.
6. It acts as the clearing house :
As banker’s bank, the central bank acts as a clearing house for transfer and
settlement of mutual claims of commercial banks. Since the central bank holds
reserves of commercial banks, it transfers funds from one bank to another bank
to facilitate clearing of cheques.
7. It helps to promote economic development :
One of the major functions of central bank in developing countries like Nepal is
to promote economic development. It can help in both agricultural and industrial
development in the country. It can promote agricultural and industrial growth

Office Practice and Accounting 10 41