Lecture- 02

Dated: January 06, 2013

The functions of a commercial bank can be grouped under three different heads:

1. Primary or Fundamental Functions: Accepting of deposits for the purpose of lending

money to businessmen or to those who need it for constructive/Productive purposes.

2. Secondary Functions: This includes agency services like collection of cheques for
customers, paying of insurance premium, house tax, electricity bills, Purchase and sale of
securities, etc. and General Utility Services like providing safe deposit lockers and
custody, Issue of Letters of Credit and Traveler’s Cheques, etc. and Dealing in Foreign
Exchange, etc.

3. Modern Functions: Banks now-a-days perform a number of modern functions also, like,
tele-banking, Providing ATM facilities, SMS alerts, Electronic transfer of funds, Issue of
Credit and Debit Cards, Internet banking, Rail/Air Ticket Reservation etc. With the
introduction of electronic and computer banking the barriers of space and time have been
removed and a customer can now do banking 24X7, all through the year at any time that
is convenient to him. So modern banking has become "Convenience Banking" for the
customer. Banking has thus made life easy for the customers.

CENTRAL BANK: BANGLADESH BANK

Pursuant to Bangladesh Bank Order, 1972 the Government of Bangladesh reorganized the Dhaka
branch of the State Bank of Pakistan as the central bank of the country, and named it Bangladesh
Bank with retrospective effect from 16 December 1971.

Functions of Central Bank (Bangladesh Bank):

It performs all the functions that a central bank of any country is expected to perform, and such
functions include.

• Monetary Policy: Formulating and managing the MONETARY POLICY of Bangladesh with
a view to stabilizing domestic and external monetary value and promoting and maintaining a
high level of production, employment and real income in the country.

• Interest Rate declaration: It sets the required interest rate for the banks as well as for the
money market so that it can control the inflation or deflation. It controls certain types of short-
term interest rates. These influence the stock- and bond markets as well as mortgage and other
interest rates.

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• Banker of the government: The bank acts as the banker of the government and accepts
government deposits, cheques and drafts, and undertakes collection of cheques and drafts drawn
on other banks. It makes ways and means for advances to the government. The bank also sells
government TREASURY BILLs on tender, PRIZE BONDs and different types of saving
certificates.

• Note Issue: like most of the central banks of different countries, exercises monopoly over the
issue of currency and the banknotes. Except for the 1 and 2 taka notes, it issues all other
denominations of Bangladeshi Taka.

• Lender of last resort: The bank acts as the lender of last resort for the government as well as
for the country's scheduled banks.

• Credit control: Bangladesh Bank exercises its wide range of power in credit control through
different types of traditional and non-traditional methods. In addition to bank rate and open
market operations, it uses a number of other weapons.

• The Country's International Reserves: Bangladesh Bank is empowered to manage the

country's international reserves, which represent aggregate of its holding of -
a. Gold,
b. Foreign exchange,
c. SDR and
d. Reserves position in the IMF.

• Representative Of The Government: The bank also acts as the representative of the
government in different international agencies and other forums such as World Bank, IMF,
Asian Clearing Union, ADB, etc.

• Watchdog of the country's BANKS: Bangladesh Bank is empowered to act as the watchdog
of the country's BANKING SYSTEM, and all scheduled banks are accountable to Bangladesh
Bank, which has extensive powers to ensure soundness of the banking system. No bank can
commence banking business in Bangladesh and no existing bank can open a new branch in or
outside the country or shift any branch from one place to another without obtaining a
license/permission from the Bangladesh Bank.

• Deposit Insurance Scheme: Bangladesh Bank runs a Deposit Insurance Scheme. The
objective of the scheme is to safeguard the deposits of the customers with both local and foreign
deposit money banks doing business in Bangladesh.

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CRR stands for Cash Reserve Ratio. It is a percentage of Bank Deposits that Banks are
supposed to maintain with Central Bank.
When Inflation is High (Money supply is high), BB increases the CRR Rate, this will mean,
Commercial Banks will have to keep more percentage of deposits with BB. This in turn will
reduce the commercial bank's Lending capacity. When lending capacity is reduced, money
supply in the economy will be less.

SLR: Statutory Liquidity Ratio. It is a part of deposits that Commercial Banks are supposed to
maintain with THEMSELVES IN LIQUID FORM. Liquid form means:
Cash, Gold or Government Bonds. This is to ensure sufficient Liquidity with Commercial Banks.

Note: Bangladesh Bank has increased from existing 5.5% and SLR to 19% from existing 18.5%.

• Clearing house: The bank acts as the clearing house of the scheduled banks.

• It provides the facility of currency exchange.

• Job creation,
• Agricultural development,
• Industrial development, and
• Natural resources developments are also the functions of Bangladesh Bank.

• Economic Growth: By doing these activities Bangladesh bank is ensuring our country’s
economic growth and strength.

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