How do central banks differ from commercial banks in terms of their roles and functions?
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Central banks and commercial banks serve distinct roles within the financial system:
In summary, central banks focus on macroeconomic stability and policy, while commercial banks provide everyday banking services and operate for profit.
Difference Between the Central Bank and a Commercial Bank
1. Accept Deposit and Lends Money:
(a) Central Bank: The central bank is the apex bank (the bank of all banks in the country). It accepts deposits from the commercial banks and advances loans to them.
(b) Commercial Bank: A commercial bank is that financial institution which accepts deposits from the general public and offers loans to the people for the purpose of consumption and investment.
2.Supply of Money :
(a) Central Bank: The central bank regulates the supply of money, besides being the principal source of money supply in the economy.
(b) Commercial Bank: A commercial bank only contributes to the supply of money by way of credit creation.
3. Custodian of Forex Reserves:
(a) Central Bank: The central bank is a custodian of forex reserve of the country. It conducts ‘managed floating’ to regulate exchnage rate of the domestic currency.
(b) Commercial Bank: A commercial bank is not a custodian of forex reserves of the country. However, it deals in the sale and purchase of foreign exchange for the purpose of profit only.
4. Note Issuing Authority:
(a) Central Bank: The central bank is a note issuing authority. It is a currency authority of the country.
(b) Commercial Bank: A commercial bank is not a note issuing authority. It is not a currency authority.
5. Focus :
(a) Central Bank : The centrak bank focuses on the growth and stability of the economy.
(b) Commercial Bank: A conmercial bank focuses on profit maximisation.
Central bank controls the monetary policy of India. It is also known as bankers to govt. It’s primary function are:
Commercial Bank provides deposit and withdrawal facilities to general public.
These banks included under 2nd schedule of RBI Act 1934 and have paid of capital equal to ₹ 5lac Or more. It’s main functions are:
Central banks and commercial banks serve distinct roles within the financial system:
In summary, central banks focus on macroeconomic stability and policy, while commercial banks provide everyday banking services and operate for profit.
Difference Between the Central Bank and a Commercial Bank
1. Accept Deposit and Lends Money:
(a) Central Bank: The central bank is the apex bank (the bank of all banks in the country). It accepts deposits from the commercial banks and advances loans to them.
(b) Commercial Bank: A commercial bank is that financial institution which accepts deposits from the general public and offers loans to the people for the purpose of consumption and investment.
2.Supply of Money :
(a) Central Bank: The central bank regulates the supply of money, besides being the principal source of money supply in the economy.
(b) Commercial Bank: A commercial bank only contributes to the supply of money by way of credit creation.
3. Custodian of Forex Reserves:
(a) Central Bank: The central bank is a custodian of forex reserve of the country. It conducts ‘managed floating’ to regulate exchnage rate of the domestic currency.
(b) Commercial Bank: A commercial bank is not a custodian of forex reserves of the country. However, it deals in the sale and purchase of foreign exchange for the purpose of profit only.
4. Note Issuing Authority:
(a) Central Bank: The central bank is a note issuing authority. It is a currency authority of the country.
(b) Commercial Bank: A commercial bank is not a note issuing authority. It is not a currency authority.
5. Focus :
(a) Central Bank : The centrak bank focuses on the growth and stability of the economy.
(b) Commercial Bank: A conmercial bank focuses on profit maximisation.
INTRODUCTION
Central Bank: financial organisation that has exclusive authority over the creation and disbursement of credit and money for an economy or group of economies and the function of formulating monetary policy. Eg.: Reserve Bank of India, Federal Reserve of USA etc.
Commercial Bank: financial organisation that handles all public deposit and withdrawal activities, as well as lending for investments and other similar purposes. Eg.: State Bank of India, HDFC Bank etc.
DIFFERENCE BETWEEN CENTRAL BANK AND COMMERCIAL BANKS
Issuing Currency
Monetary Policy
Regulation and supervision
Deposits, loans and transactions
Aim
CONCLUSION
Central bank and commercial banks form the basic structure of the banking system in the country.
Central banks, like the Federal Reserve or European Central Bank, oversee monetary policy, regulate financial systems, and act as lenders of last resort during crises. They aim to maintain price stability, control inflation, and promote economic growth through tools like interest rates and reserve requirements.
Commercial banks, privately owned, provide services such as deposit-taking, lending, and payments. They offer products like mortgages and savings accounts, playing a crucial role in the economy by channeling funds between savers and borrowers. Commercial banks implement monetary policies set by central banks through adjustments in lending rates.
Regulation-wise, central banks supervise banks to ensure stability and protect depositors. They establish rules, conduct audits, and monitor financial health. Commercial banks operate under these regulations, maintaining capital requirements and reporting standards.
During financial crises, central banks serve as lenders of last resort, offering emergency liquidity to stabilize the system. Commercial banks rely on this support during stress but cannot provide it themselves.
In essence, central banks focus on economic stability and policy-making, while commercial banks provide essential financial services under regulatory oversight, both vital to a stable financial system.