Functions of commercial and central bank

 A. Commercial banks

1. Receiving Deposits: The first and foremost function of a commercial bank is to receive or collect deposits from the public in different forms of accounts e.g. current, savings, term deposits. No interest is charged in the current account, a lower rate of interest is charged in the savings account, and comparatively higher interest rates charged in fixed deposits. Thus, commercial bank builds up customer network.

2. Accommodation of loans and advances: Commercial Bank attaches much importance to providing loans and advances at a higher rate than the deposit rates and thus earns profits on it. Working capital is accommodated to the borrower for expansion and smooth running of the business. In a similar manner, the commercial bank extends financial accommodation for the development of agriculture and industry. Credit accommodation is provided to the entrepreneurs for reviving sick and old industries as per Govt. directives. Thus, the commercial bank also extends welfare services to the people at large.

3. Creation of Loan Deposits: Commercial Bank not only receives deposits from the public and accommodates loans to the public but also creates loan deposits. For example: while disbursing loans as per sanction stipulation, the amount of loan is credited to the borrower’s account. The borrower may not withdraw the full amount at a time. The residual amount i.e. balance left in the account creates loan deposits.

4. Creation of medium of exchange: Central Bank has got exclusive right to issue notes. On the other hand, Commercial Bank creates a medium of exchange by issuing cheques. Like notes, the cheque is transferrable being popularly used in banking transactions.

5. Contribution to foreign trade: Commercial Bank plays a vital role in expediting foreign exchange and foreign trade business e.g. import, export, etc. It contributes greatly to the economy through import finance and export finance and thus, earns foreign exchange for the country.

6. Formation of capital: Commercial Bank extends financial assistance for the formation of capital in the trade, commerce, and industry in the country which expedites its economic development.

7. Creation of Investment Environment: Commercial Bank plays a significant role in creating investment environments in the country.

8. Safe custody of valuables: Commercial Bank introduces ‘locker’ services to the customers for the safe custody of valuables e.g. documents, shares, securities, etc.

9. Act as a Referee: Commercial Bank acts as a referee for and on behalf of the customers.

10. Act as an Adviser: Commercial Bank provides valuable advice to the customers on different products, business growth, and development, the feasibility of business and industry.

11. Maintenance of secrecy: Maintenance of secrecy is one of the most important functions of the commercial bank.

12. Economic Development and Welfare activities: Commercial Bank contributes much to the welfare and economic development of the country.

B. Central Bank

1. Issue of notes and coins: The first and foremost function of the central bank is to issue notes and coins as per the needs of the public and requirements of business and commerce. As per rules, notes are issued against gold, silver and foreign currency. Bangladesh Bank (Central Bank) keeps foreign currency reserves as security against issuance of notes. Bangladesh Bank unilaterally reserves the right to issue notes.

2. Government Bank: Central Bank acts as banker and economic adviser of the Government. The central bank conducts and maintains Government accounts for all Government receipts and payments.

3. Banker’s Bank: Central Bank acts as banker’s bank. As a rule, all scheduled and commercial banks have to maintain Statutory Liquidity Reserve

4. Lender of the Last Resort: In case of the financial crisis of the commercial banks, the central bank acts as a lender of the last resort through lending against first class securities, bill of exchange, etc.

5. Reservoir of foreign currency: Central Bank maintains Foreign Currency Reserve.

6. Clearing House: Central Bank acts as a Clearing House for settlement of inter bank transactions.

7. Control Currency Market: Central Bank acts as a controller and guardian of the currency market. For the purpose of formation, control and maintenance of currency market and for its overall development, the central bank is the pioneer.

8. Stabilize Exchange Rate: Central Bank maintains stability of the foreign currency exchange rates by means of controlling credit. Stable exchange rates position helps create favourable balance of trade and acceptability of stable currency gets momentum in the international market.

9. Maintain Gold Standard: Central Bank is responsible for maintenance and control of gold reserve.

10. Stabilize Price-Level: Fluctuations and frequent changes of price-level affect economic growth. With a view to making good of the economic imbalances and crisis situations, central bank takes necessary measures for stabilizing price-level.

11. Development of Agriculture and industry sector: Central Bank formulates policy for the expansion of the Agri and industry sector for the purpose of economic upliftments in the country.

12. Development of natural resources: Central Bank plays vital role for tapping natural resources which may lead to economic growth.

13. Adviser and Representative of Government: Central Bank advises Government on economic issues and sometimes acts as a representative of the Government.