Question

Explain ‘government’s banker’ function of the central bank.

Answer 1

The central bank acts as a banker and financial advisor to the government. As a banker to the government, it performs the following functions. 

(i) Managing the account of the government: The accounts of the central government as well as the state government are managed by the central bank.

(ii) Acceptance of receipts and making of payment on behalf of government: The central bank accepts various receipts from the government such as the deposits and makes various payments and remittances on behalf of the government.

(iii) Granting of short-term loans and credit: The central bank grants short-term loans and credit to the central and the state government as when required. The government can borrow from the central bank by selling treasury bills to it.

(iv) Managing the public debt: The central bank of a country also performs the task of managing the public debt of its government. That is it manages the issue of new loans by the government.

(v) Advisor to the government: The central bank advises the government on all the banking and financial related matters. It also helps in the formulation of policies related to the money market.