Question

Explain the 'Clearing House Function' of the central bank.

Answer 1

1. The central bank provides a clearing house facility to the commercial banks. In other words, it settles the claims of commercial banks through a process of book entries.
2. The daily balances between the commercial banks can easily be adjusted by means of debit and credit entries in their respective accounts with the central bank.
3. Let us take an example to explain this process. Suppose the Bank of Baroda has to pay an amount of ₹ 20 lakhs to the Punjab National Bank. To settle its dues, the Bank of Baroda will issue a cheque of ₹ 20 lakhs to the Punjab National Bank. The Reserve Bank of India will debit the account of the "Bank of Baroda" by ₹ 20 lakhs and credit the account of the Punjab National Bank by the same amount.
4. The clearing house facility offers several advantages. Firstly, settlements between different commercial banks can be made conveniently through book entries. Secondly, the possibilities of cash withdrawals during an economic crisis are reduced. Therefore, it helps to stabilise the banking system in the country. The State Bank of India carries out these settlements where the Reserve Bank of India has no office.