The central bank acts as a banker's bank. In this capacity it performs valuable services to its scheduled commercial banks. These indispensable services are as follows:
a. Lender of the last resort: a friend in need is a friend indeed, as a popular saying goes. It exactly applies to the relations of the central and commercial banks. In crisis, when a commercial bank has exhausted all its resources and still finds itself unable to meet all its obligations and outstanding dues the central bank comes forward to rescue it.
b. Rediscounting of the bill of exchange: another invaluable service performed by the central bank is to rediscount bills of exchange. Commercial banks discount bills of exchange of businessmen. Discounting means encashment of the bill before it matures, at a rate of interest.
c. Clearing house services: the central bank provides clearing house facility to commercial banks. Every bank receives cheques drawn on other banks, because of which every bank becomes creditor or debtor to the other bank or banks.
d. Cash reserves: under banking law, every commercial scheduled bank is bound to deposit a certain percentage of all its deposits (time and demand deposits) with the central bank.
e. Counseling services: the central bank offers precious advice and counseling services. In the light of its expert opinions and advice commercial banks formulate and readjust their policies.
a. Lender of the last resort: a friend in need is a friend indeed, as a popular saying goes. It exactly applies to the relations of the central and commercial banks. In crisis, when a commercial bank has exhausted all its resources and still finds itself unable to meet all its obligations and outstanding dues the central bank comes forward to rescue it.
b. Rediscounting of the bill of exchange: another invaluable service performed by the central bank is to rediscount bills of exchange. Commercial banks discount bills of exchange of businessmen. Discounting means encashment of the bill before it matures, at a rate of interest.
c. Clearing house services: the central bank provides clearing house facility to commercial banks. Every bank receives cheques drawn on other banks, because of which every bank becomes creditor or debtor to the other bank or banks.
d. Cash reserves: under banking law, every commercial scheduled bank is bound to deposit a certain percentage of all its deposits (time and demand deposits) with the central bank.
e. Counseling services: the central bank offers precious advice and counseling services. In the light of its expert opinions and advice commercial banks formulate and readjust their policies.
