Principles of central banking

Three main considerations govern the operations of a central bank; these are known as the fundamental principles of central banking. Firstly, the central bank is always motivated by the spirit of national Welfare. The operations of the central bank must always be guided by the objective of maximizing the welfare of the people or the nation and not by maximizing the profits as is the objective of commercial banks. It does not, however, mean that the central bank should undertake activities without keeping in view their financial implications or results. As a matter of fact when de Kock said that the central bank should work exclusively in the interest of public welfare he meant that profit earning should be a secondary consideration for a central bank and the maximization of public welfare should be its primary objective. Secondary, the central bank’s operations should aim at maintaining the monetary and financial stability in the economy. And from this point of view, every central bank has been provided with wide powers for controlling the monetary and banking structure of a country and for achieving this objective. Thirdly the central bank’s activities should be free from all political considerations or influences. It should not be governed by the ideology of any particular political party. It does not mean that it should not work in using with the government of the country. What it means is that it is not the ideology of political party in power that would decide its policy but the economic conditions of the country which should receive the foremost consideration from the central bank. Since the Government is also expected to solve the economic problems of the country and the central bank is also supposed to find out a solution for the economic problems of the country, therefore both these should work in cooperation with each other. Finally, a central bank should not compete with the commercial banks in the country or should not perform such banking transactions as a accepting deposits from the general public and accommodate regular commercial customers with discounts or advances.

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Structure of the Indian banking system

The organization of banking system in Indian can broadly be divided into three categories, viz., and the central of the country known as the Reserve Bank of India, the Commercial banks and the Co-operative banks. As the supreme monetary and banking authority in the country, RBI has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the “Reserve Bank”.

Commercial banks have been in existence in India for many decades. They mobilize savings in urban areas and make them available to large and small industrial and trading units mainly for working capital requirements. After, 1969, commercial banks are broadly classified into nationalized or public sector banks and private sector banks. The State Bank of India and its associate banks along with another 20 banks are the public sector banks.

The private sector banks include a small number of Indian scheduled banks which have not been nationalized and branches of foreign banks operating in India- commonly known as foreign exchange banks.

The Regional objective of providing (RRBs) came into existence in the middle of 1970s with the specific objective of providing credit and deposit facilities particularly to the small and marginal farmers, agricultural labourers and artisans and small entrepreneurs. RRBs have the responsibility to develop agriculture, trade, commerce and industry in the rural areas. RRBs are essentially commercial banks but their area of operation is generally limited to a district.

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