Banker to banks
Topic: Banking, Credit Creation and Monetary Policy · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"
Meaning
Banker to banks is the central bank's role as a bank for commercial banks. RBI holds banks' accounts and their reserves, including the balances kept under the Cash Reserve Ratio (CRR). It settles payments between banks and lends to them when they need funds. In a crisis, it acts as lender of last resort, meaning it lends when no one else will, which prevents panic. RBI did this central-banking work from its start in 1935. The year 1949 was only when it was nationalised.
Example
Bank A owes Bank B money after a day of customer payments. Both banks hold accounts with RBI, so RBI settles the amount by moving funds from A's account to B's. If a bank runs short of cash, it can borrow from RBI.
Don't confuse with
- Banker to government: in this role RBI manages the government's accounts and public debt. It also gives ways and means advances, which are short-term overdrafts to the government. Banker to banks serves commercial banks.
Related concepts
- Central bank
- Currency issue monopoly
- Lender of last resort
- Bank supervision
- Economic Capital Framework
- Central Bank Digital Currency
- Retail CBDC
- Wholesale CBDC