In this article we will discuss about the role of central bank in LDCs.
Commercial banks are either not developed or are poorly developed in a less developed economy. In LDCs, money, capital and bill markets are also not fully developed. For rapid development of sound commercial banking system and organised bill, capital and money markets, the central bank has a positive and dynamic role to play.
In these countries commercial banks can be encouraged by providing cheap and liberal discounting facilities by encouraging them to lend more. These provisions to the commercial banks can be made possible by the government by reducing the stamp duty on certain types if credit instruments on the suggestion and advice of the central bank.
Commercial banks in LDCs are mostly small in respect of their resources As a result they cannot bear expenses of establishing their own management training schools and colleges. In this respect the central bank can play a role and colleges.
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The central bank in an LDC must also prepare the branch expansion programme for the commercial banks for balanced development of a viable commercial banking system in the economy. By giving several positive monetary and non-monetary incentives the central bank should encourage commercial banks to open their branches in the backward regions of the economy.
The central bank in an LDC has to perform certain traditional functions as well. Besides this, it should follow a monetary policy that can serve as an effective instrument of planned economic growth with stability. It has to perform many developmental functions for initiating and accelerating the economic development of the country.
It should formulate the policy to assist the process of capital formation by encouraging mobilisation of savings in the economy. In LDCs agriculture plays a predominant role in various respects. For rapid development of the economy, development of agriculture is absolutely essential.
Development of agriculture through mobilisation requires adequate credit supply at low rate o interest and at easy repayable installments. The central bank can help establish credit institutions like land development banks, agricultural refinance and development institutions, regional rural banks etc.
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In most LDCs the industrial sector is either absent or inadequately developed. The central bank help the development of industrial sector by promoting specialised industrial finance institutions like the Industrial Development Bank of India, Industrial Finance Corporation and State Finance Corporations, etc.