Development of Central Banks in Central Banking

DEVELOPMENT OF CENTRAL BANKS IN CENTRAL BANKING

This article is on Development of Central Banks in developing countries as a part of CAIIB Syllabus 2022 for DEC 2022 Exams.

As a banker, you must know how other people think that being a banker is boring but ask yourself (hopefully, you are a banker) how much you have learned so far in your interactions with your bank’s customers. I am sure that you would have already started thinking about someone you had any interesting interaction with (Do tell me in the comment section of your experience).

So, if it’s such a learning curve then think about working with the central bank. In our case, think of Reserve Bank of India.

It already sounds amazing, isn’t it? So, why not?

So, I would tell you that you have chosen a great career option choosing the ‘Central Banking’ Exam as an Elective paper for Certified Associate of the Indian Institute of Bankers i.e CAIIB Dec 2022 Exams!

START PREPARING FOR CAIIB CENTRAL BANKING

As the Exam date for the optional paper of Central Banking (others as well) falls due on December 10, 2022, you should start exploring the subject. And on this page, as mentioned earlier, you are going to know almost about the history of central banks.

In this article, though we will discuss about the development of Central banks in the developing countries. Its part of the IIBF prescribed Curriculum for Central Banking paper of CAIIB.

So, without further delay, let us begin with it!

DEVELOPMENT OF CENTRAL BANKS IN DEVELOPING COUNTRIES

‘Economists find bankers fascinating. After all, you are the white mice we study.’ — Paul A. Samuelson

Central banks have always been seen from the point of their capability to provide solution for burning contemporary issues of their status, objectives and functions amidst globalized financial liberalization & the independence for central banks.

The central banks been never been so much in the public forum – for their academic, institutional and political – roles as in recent years. It began with the widely acclaimed reform & statutory independence of the Reserve Bank of New Zealand in year 1989.

For the first time there was a full-fledged periodical on central banking. Central banking today has genuinely transitioned more than what an institutional reform entail.

Today we will get an overview on the comprehensive, analytic, and normative framework of central banks.

Central banks are an model of a distinct social institution that today is facing a variety of demanding challenges. Among the central issues, the important ones include the importance of price, exchange, & economic stability as objectives; the relative scope of financial, regulatory, advisory, and developmental roles of central banks; the transition to indirect monetary policy instruments; the conflict b/w monetary policy and its other roles; the fiscalization of central banks; the macroeconomic implications of losses to central banks; scope & limitations of central bank autonomy and limits on credit to government; organizational reform of central banks which also includes the partial privatization option.

In the developing countries –

central banking are viewed as a policy-making process,
central banks as organisations and
central bankers as human capital.

The central bank as mentioned above, are regarded as the supreme monetary authority in every country, and accordingly its entrusted with different useful & important functions to ensure smooth functioning of an economy.

Besides certain conventional functions, the central bank in a budding economy can play a special role & that is of the Reserve Bank.

RBI Functions

Extending currency supply to finance development plans

A developing country like India is to undertake massive development plans and programmes for revving the development speed & for that country has to rely on the method of deficit financing (i.e., the issue of new paper-notes) among other methods.

Being the sole note-issuing authority, it helps in providing adequate finance to finance its massive plan outlays.

Controlling Inflation & Holding Cost Escalation

The rising price level is regarded as a concomitant of economic development. The central bank in a developing economy is required to take necessary steps in maintaining the price line at a selected level so that plan-estimates are not totally disturbed due to cost-increase.

In a developing economy, there are some traditional & new tools of monetary controls, especially for selective credit controls to check the inflationary rise in prices. The measures such as higher margin requirements for speculative advances, higher & incremental CRR, higher SLRs, penal rates of interest, higher bank rates & lending rates, etc. are adopted by the central bank to least moderate or stop the cost escalations.

Mobilisation of Resources & supply of adequate credit

The central bank assists in mobilising domestic resources for financing the development plans through floating new loans.

Monetary policy having main focus of development

Reserve Bank of India for promoting economic growth with stability has formulated a development-oriented monetary & credit policy such as the policy of controlled expansion of bank credit.

By following this monetary policy, the central bank can bring about the preferred allocation of resources.

The task is to strike a balance between two conflicting objectives of expansion of the economy, and control of such expansion for achieving price stability and it is a very delicate one.

Direct the bank credit to the priority sectors

The central bank of a developing country also frames its monetary & credit policy in such a manner that larger and preferred quantities of bank credit go to the priority sectors e.g. agriculture sector, cooperatives, MSMEs & export trade.

Similarly, it is to formulate a policy to extend liberal bank credit to the weaker and neglected sections of society.

Creating a powerful infrastructure & growth of institutional facilities for industrial & agricultural finance

A developing economy is required to develop institutional facilities for agriculture and industry because more or less they remain inadequate. So, it’s central bank which can work to extend the institutional facilities for agricultural and industrial finance.

Indian Central Bank, Reserve Bank of India, following the above notion has taken vigorous steps to re-organise the rural credit structure with the help of co-operatives, NABARD, & RRBs.

Likewise, to develop institutional facilities for industrial finance it played a very important role by establishing some technical institutions like the Industrial Finance Corporation, the Industrial Development Bank, etc by subscribing to their shares and debentures by a large amount.

Management of Debt

In an underdeveloped country, debt management is one of the essential operations of the central bank. Being debt-ridden is not a favourable situation for any nation & the central bank is in the position to control it & should aim to follow proper timing for issuing of government bonds, stabilizing their prices and minimizing the cost of servicing public debt.

In order to maintain and stabilize the market for government bonds, the central bank has to maintain the interest rates is low. In doing which, the price of government bonds are raised, thereby making them more attractive to the public. This step to keep the interest rates low is also known for minimizing the cost of servicing the national debt.

Exercising the exchange control

Foreign exchange constraint is often found to be a serious barrier to the growth of a developing economy. Accordingly, the best way for growing the proper structure can be the rational use of the country’s scarce foreign exchange, as it had been done by the our Central Bank, Reserve Bank of India, at the early years of planning.

Designing sound banking structure

In a developing economy, there are many things that can be changes for the best just by adopting positive steps & measures such as deposit insurance, nationalisation of banks, creating a suitable bill market scheme which are essential for faster economic growth.

Training Facilities

A major problem in designing the banking system in developing countries is the lack of qualified staff. The central bank can provide training facilities to meet the personnel needs of the banks.

So, the central banks are liable to oversee the monetary system for a nation among other wide range of responsibilities starting from overseeing monetary policy to its implementation to achieve: currency stability, low inflation, & full employment, be the regulator & authority in the banking and monetary systems.

Although in most developing countries, at the early stage of development, it will be unlikely that there exists a sound commercial banking system to provide adequate provision for the growing need for finance & in that case, the central bank should come forward to fill up the gaps.

I sincerely hope that you would have liked the above article & would be more than excited to work in the field & would be ready to take on the journey of CAIIB with new enthusiasm!

Now, I would like to bring forward the Study Material to be introduced by Learning Sessions for the elective paper of CAIIB i.e Central Banking.

The Classes will be conducted by the expert faculty of banking teachers. For more details, you can take a look below.

CENTRAL BANKING LATEST STUDY MATERIAL 2022

Central Banking is one of the optional papers for Certified Associate of the Indian Institute of Bankers. For the December 2022 Attempt of CAIIB, Learning Sessions is going to introduce the Video Classes Study Material for the CAIIB candidates who have chosen it as their elective paper.

Following will be the contents of your Central Banking Study Material:

Live classes of Central Banking + Latest Recorded Lectures
Expert faculty for banking exams
24 by 7 access to Lecture & other materials
Access through apps (both – iOS/android) & browser
Unlimited views on the video classes (recorded)
Mock Tests for practicing & the Memory Recalled Questions as per the latest CAIIB Exam pattern
Downloadable lectures (recorded ones)
Most reasonable prices & Flexibility of packs
Language of Live & Recorded Lectures: Hinglish
Latest IIBF prescribed Syllabus 2022

Access the courses through:

- Android App: LS PRO or IIBF LEARNING CENTER

iOS App: My Institute (Code: gegkt)
Website for Exam Materials: iibf.info

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CENTRAL BANKING INTRODUCTION IN CAIIB ELECTIVE 2022