Explain banker’s bank function of Central bank with the help of a numerical example.

Dear Student,

As we know that the Central bank is the apex bank of any country ,being the Apex bank it performs some duties and functions  as well one of which is central bank acts as a banker's Bank.

As per this function central bank allows Commercial banks  park there excess funds with the Reserve bank and Central Bank  provide them interest at  reverse repo rate.It is in the same manner as we deposits our excess funds with the commercial Banks
For Ex :If the Commercial Bank has excess funds of Rs 2500000 then it can safely park there funds with the central bank and earn interest at Reverse repo rate,

Further in case Commercial banks need funds it also lends money to the commercial Banks and make sure the banks do not have shortage of funds.For this Central bank charges interest at a rate equal to Repo Rate .It is in same manner as we borrow(in form of loans)  the money from the commercial banks
For Ex :If the Commercial Bank have shortage of funds Rs 2500000 then it can borrow the same from the central bank and pay interest which is equal to Repo Rate

Regards


 

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