Let us learn about the Role of a Central Bank in Less Developed Countries.
The central bank is an indispensable institution—be it in a developed or a less developed country. But there was a time when people believed that a central bank, being a luxury institution, must not be set up—at least in an underdeveloped economy.
Nowadays, no one thinks in that way. It performs so many functions that its existence is of prime necessity. Its existence is justified on the ground that it performs certain strategic functions.
Being a note-issuing authority, it provides money supply as required by the economy. But, at the same time, it has been empowered to control money supply including bank credit to ensure price stability. Not only this, it directs its policies in such a way that exchange rate stability can be maintained. But it does something more than this. It plays a special role in a less developed country, as the RBI does in our country.
Most of the underdeveloped countries have adopted national planning to accelerate economic development. Implementation of planning requires huge finance. The central bank can assist the government by providing necessary money as it has the sole authority to issue paper notes.
But, at the same time, it controls and regulates total money supply to ensure stability in prices. Otherwise, benefits of faster economic growth will be lost. The RBI’s policy in this connection has been rightly dubbed as ‘controlled’ monetary expansion. The object is to attain growth with stability.
In most underdeveloped countries, the banking system is underdeveloped. They do not have adequate institutions to meet the genuine needs of trade and industry. The central bank, through its promotional role, develops the necessary banking infrastructure. The purpose is to mobilize savings for financing development plans.
It helps in extending banking operations in the unbanked and under-banked areas. It allocates a large amount of credit in the priority sectors. Furthermore, it takes the responsibility of extending the institutional facilities for financing agriculture and industry.
India’s rural credit structure has undergone a radical change under the dynamic leadership of the RBI. Under the RBI’s initiative, several financial institutions like IFCI and IDBI have been set up to meet the financial needs of industry. To promote finance for exports, the RBI set up the EXIM bank in 1982.
In view of these specialized functions, no one believes that the central bank is a nonessential or a luxury institution. It acts as a ‘potential development agency’.