Question

Give the need of Central Bank.

Write short note on the following:

Need of a Central Bank

Answer 1

The presence of a central bank in modern times is clearly essential. Commercial banks have a wide-ranging impact on the economy, especially through their ability to create credit. Today, these banks operate as profit-driven businesses and may not always consider the broader national interest when designing their credit policies. For example, during periods of high inflation, it might be necessary to cut down credit supply, but profit-motivated banks may continue lending if it remains profitable. Therefore, a central authority is needed to align credit policies with the economic needs of the country.

Additionally, it is important to ensure that the operations of all other types of banks also meet the nation’s requirements. While full control isn’t needed, proper guidance and support, especially in times of difficulty, are essential.

All of this highlights the need for a central, apex institution that can oversee, regulate, and support the entire banking structure. Since managing and monitoring the banking system demands deep knowledge and continuous engagement, this responsibility cannot be directly handled by the government. Hence, it is both necessary and urgent to establish a separate central bank to perform these critical functions for the economy.