The Central Bank acts as ____ to both central and state government

The Central Bank acts as banker to both central and state government.

Explanation:-

Banker to the Government:-

The Reserve Bank of India acts as a banker, agent, and financial advisor to the Central Government and all the State Governments.

As a banker, it carries out all banking business of the government.

1. It maintains a current account to keep its cash balances.

2. It accepts receipts and makes payments for the government and carries out exchange remittance and other banking operations.

3. It also gives loans and advances to the government for temporary periods. The government borrows money by selling treasury bills to the Central Bank.

As an agent, the central bank also has the responsibility of managing the public debt.

As a financial advisor, the central bank advises the government from time to time on economic financial, and monetary matters.

Banker’s Bank and Supervisor:-

As the banker to banks, the central bank functions in three capacities:

(i) Custodian of Cash Reserves:

Commercial banks are required to keep a certain proportion of their deposits (known as Cash Reserve Ratio or CRR) with the central banks.

In this way, the central bank acts as a custodian of the cash reserves of commercial banks.

(ii) Lender of the Last Resort:

When commercial banks fail to meet their financial requirements from other sources, i.e., in case of a financial emergency, they approach the central bank to give loans and advances as lender of the last resort.

(iii) Clearing House:-

As the central bank holds the cash reserves of all the commercial banks, it becomes easier and more convenient for it to act as their clearing house.

As a supervisor, the central bank regulates and controls the commercial banks.

The regulation of banks may be related to their licensing, branch expansion, liquidity of assets, management, merging, winding up, etc.

The control is exercised by periodic inspection of banks and the returns filed by them.