Describe the "banker's bank and supervisor" …

Functions of a Central Bank. Main functions of a Central Bank are to act as governor of the machinery of credit in order to secure stability of prices. It regulates the volume of credit and currency, pumping in more money when market is dry of cash, and pumping out money when there is excess of credit. Broadly, a central bank has two departments, namely, issue department and banking department. We discuss below its main functions.
1.    Issue of Currency. The central bank is given the sole monopoly of issuing currency in order to secure control over volume of currency and credit. These notes circulate throughout the country as legal tender money. Note-issuing is governed by Minimum Reserve System i.e. while issuing currency notes, a minimum fixed amount of gold and foreign currency is kept by Central Bank. It has to keep a reserve in the form of gold and foreign securities as per statutory rules against the notes issued by it. It may be noted that RBI issues all currency notes in India except one rupee note. Again it is under directions of RBI that one rupee notes and small coins are issued by government mints. Remember, central government of a country is usually authorised to borrow money from the central bank. When central government expenditure exceeds government revenue and Govt, is unable to reduce its expenditure, then it borrows from RBI. This is done by selling security bills to RBI which creates new currency notes for the purpose. This is called monetisation of budget deficit or deficit financing. The government spends new currency and puts it into circulation to meet its expenditure.
2.    Banker to the Government. Central Bank functions as a banker to the government— both central and state governments. It carries out all banking business of the government. Governments keep their cash balances in the current account with the central bank. Similarly, central bank accepts receipts and makes payment on behalf of the governments. Also central bank carries out exchange, remittance and other banking operations on behalf of the government. Central bank gives loans and advances to governments for temporary periods, as and when necessary, and it also manages the public debt of the country.
3.    Bankers’ Bank and Supervisor. There are usually hundreds of banks in a country. There should be some agency to regulate and supervise their proper functioning. This duty is discharged by the central bank. Central bank acts as banker's bank in three capacities : (i) it is custodian of their cash reserves. Banks of the country are required to keep a certain percentage of their deposits with the central bank; and in this way the central bank is the ultimate holder of the cash reserves of commercial banks. (ii) Central bank is lender of last resort. Whenever banks are short of funds, they can take loans from the central bank and get their trade bills discounted. Thus Central Bank is a source of great strength to the banking system. (iii) It acts as a bank of central clearance, settlements and transfers. Its moral persuasion is usually very effective so far as commercial banks are concerned.
4.    Controller of Credit and Money Supply. It is an important function of a Central Bank to control credit and money supply through its monetary policy. There are two parts of monetary policy, viz., currency and credit. Central Bank has monopoly of issuing notes and thereby can control the volumes of currency. Main objective of credit control function of a Central Bank is stabilising of price level. It controls credit and money supply by adopting quantitative measures and qualitative measures, namely, (i) Bank Rate, (ii) Open Market Operations, and (iii) CRR which influence credit availability and credit creation.C