Functions of central bank – Banker to the government

Just as commercial banks are people’s banks, the central bank is a banker to the Government. In the capacity of a Government’s bank it performs the following functions.

The central bank acts as a banker, adviser and agent of the government.

a] Banker to the Government

a] The central bank is the custodian of Government funds. It keeps all cash balances of the Government, but does not pay any interest on such funds.

b] It makes and receives payments on behalf of the Government such as salaries to government servants, payment of interest to people on public debt, pension to Government servants etc.

c] Transfers government funds from one place to another and from one account to another.

The RBI has many offices in most states and therefore can transfer funds easily. In other places the SBI acts as the agent of the RBI.

d] It advances short term [temporary] loans to the government known as “ways and means loans” as and when required. This is usually done by discounting the Government treasury bills.

e] it makes extraordinary advances to the Government during emergencies.

f] It provides foreign exchange to the government to meet its external debt obligations and to spend money in foreign countries.

g] the central also helps the government to raise long term loans, often directly contributing in such loans or by underwriting such loans.


b] Advisor to the government

The central bank advises the Government on all monetary and economic matters such as

deficit financing,
devaluation of currency,
Public debt,
Price stability,
trade policy,
foreign exchange policy,
commercial policy,
monetary policy,
budgetary policy,  etc.

Since the central bank possesses full the information about the working of the economy, it is in a position to offer useful advice to the Government.

Advice is also sought on certain aspects of formulation of the country’s five year plan such as financing pattern, mobilization of resources.

In India RBI advises the government on all banking and financial matters such as preparation of the financial budgets, resource mobilization, measures to control inflation etc.

c] Agent of the government

As the agent of the government the central bank
a] the central bank manages public debt.
Raises loans by selling securities and bonds, payment of interest, repaying loans on maturity etc is undertaken by central banks.
b] Central bank maintains exchange rate stability.
c] as a representative of the Government it manages the country’s financial relations with international financial institutions like,  IMF, world bank etc.

In short it is a friend, philosopher and guide to the government.

Posted in General Economics