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Saturday, July 31, 2010

Central Banking

Introduction
Central bank is the regulator of banks and other financial institutions that have so far developed in number of countries that include both advanced and developing countries. In this regard, Nepal is no exception to this international phenomena regarding of how the central bank dominates the baking system in the global contCentral Bankingext. But the way how the central bank has developed in Nepal has a curious history because it came only after the development of commercial banks. Central bank has a major task and responsibility to stabilize the economic growth and financial system of economy. Thus, all the government fiscal, monetary and economic policies are being smoothly implemented in the country with the active support and help of central bank. In almost all countries, central bank is assigned with with the basic tasks and responsibilities to promote the economic welfare of the country in broader perspective. This is in consonance to creating favourable and sustainable conditions of macroeconomic development. Considering the recent development, Nepal Rastra Bank being the central bank of Nepal, has revised its monetary policies considering the compliance of international banking standards as started in Basel Report. Growth of commercial banks, finance companies, development banks and regulated coorporatives permitted to take limited banking functions have to follow directives and adjust capital base requirements accordingly and initiate macro credit and priority sector lending to uplift the living standards of the poor living in rural area.


Brief History Of Central Bank
The brief history of central bank is important as it affects the functions and efficient operations of financial market. Unlike commercial bank, central bank is a dominant authoritative bank in highly industrialised countries. In historical perspective, bank of England (1694) was one of the oldest central banks that prove successful in operations and monitoring of other banks. Being originated from Europe, International Conference held in Brussels during 1920 agreed with common agenda of establishing central bank in the most of the European countries. Likewise, European central bank has been developed. In the political business cycle, the independence of central bank is proving very important but questionable and doubtful.
Central bank is a bank that provides financial and banking services for the government of the country and its regulatory system as well as implementing the government's monetary policies. The main functions of central bank are: to manage the government accounts, to accept government deposits, and grant loans to the commercial banks and to control issue of bank notes. Moreover, it tells to manage the public debt, help to manage the exchange rate when necessary and to influence the interest rate structure as well as money supply. In addition, the central bank performs the functions to hold the country's reserves of gold and foreign currency, to manage dealings with other central banks, and to act as a lender of last resort to the banking system. Examples of major central banks include the Bank of England in the UK, the Federal Reserve Bank of the USA, Reserve Bank of India, Bank of Japan, Deustche Bundes Bank in Germany, France Banque De France and Nepal Rastra Bank in Nepal.
The core functions of central banks have continued to be the same in almost every country. They have the monopoly of note issue and they act as bankers to the government. They are the custodians of the metallic and foreign exchange reserves of the countries.They also perform the function of lender of the last report. They also have the function to control and regulate credit. These are the standard functions of a central bank and they are being performed by each and every central bank. However, in the developing economies besides these functions, the central banks have to play a promotional role in widening and designing the financial infrastructure.
As important function of central bank is to regulate the monitory and financial system in such a way as to promote the objectives of economic policy. These presupposes the existence of a well organised financial system. But this is hardly the case in developing economies and therefore the central banks in these countries have to take on themselves the responsibilities of building a viable infrastructures. The functions and responsibilities of the central banks are thus challenging in the developing economies then in the developed countries. Besides playing the traditional role of regulating the growth of money and credit, they have to create and nurture a viable and modern financial system.
Further added responsibility of central bank is to correct balance of payments, to provide equitable distribution of income and wealth, maintain reasonable price, stability and coordinating various ingredients of the macro economic policies of government. As such, central bank is a basic instrument of government's economic policy on one hand and powerful regulator of nation's financial system to avoid all kind of financial scandals and irregularities in regular functions of the banks and financial institutions in the country on the other hand. Even in our country, central bank popularity known by the name of Nepal Rastra Bank (NRB) tlhat is established in April,1956 is the basic regulator responsible for the overall growth of national economy through prudent management of the fiscal and monetary policies
to help support government in maintaining macroeconomic stability of the country.
At the same time, Nepal Rastra Bank is considered as the leading force to control, manage, monitor and supervise the banks and financial institutions so as to protect depositors from fraudulent practice depicted in such institutions. At present, the restructuring and institutional strengthening of Nepal Rastra Bank have encouraged suitable amendment in Nepal Rastra Bank Act. These has been already initiated to empower its scope and coverage in managing the financial system of the economy. Under financial saver reform program initiated from 2,000 onwards, the focus has been on restructuring of Nepal Rastra Bank to enhance staff-productivity, three-stage voluntary retirement plan, strengthening and upgrading regulatory and supervision system, divestiture of shares owned by NRB, upgrading of accounting system and computerisation in operations. NRB took over management of problem-facing entities depending open their performance and financial states and also created an environment for improving low performing and problem-ridden banks and financial institutions NRB strategic plants 2006-2010 prepared to help NRB fulfill its duties and responsibilities in effective manner. Even then, the ways and practices followed by NRB are still not up to the standard due to institutional weakness and inadeqauate professional expertise within the working style of NRB itself. Change in attitudes of those involved in policy and regulatory framework of NRB is still a challenging task that in going ahead.

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