Function of State Bank of Pakistan & Function for Bankers

Function of State Bank of Pakistan & Function for Bankers

INTRODUCTION: Every Country must have a state bank of Pakistan. The guiding principle of State bank of Pakistan is that it should act in the public interest and for the welfare of the country as a whole without regard to profit as a primary Consideration. It is a bank, which is responsible for the financial and economic stability of the country. Therefore government authorized it to formulate and implement the economic policies (monetary policy & fiscal policy), issue currency notes and store foreign reserves. Central bank of Pakistan name is state bank of Pakistan.

HISTORY: As a result of partition of India, Pakistan came into being on 14th August. 1947. To run the financial affairs of the new-born country the governor general of India issued an order called Pakistan Monetary system and Reserve Bank Order, according to which Reserve Bank of India, the central bank of India, would undertake and manage the financial and currency system of Pakistan up to September 30, 1948. Consequently, Indian currency notes were overprinted ‘Pakistan’ for circulation in the new – born country. However, the Reserve Bank of India could not discharge its functions in line with the particular situation in the country; as such the need for establishing its own central bank was felt. Hence three months before the expiry of stipulated period set under the order, State Bank of Pakistan came into being on 1st July, 1948, opened by the Quid-e-Azam. The bank was entrusted with the functions of issuing Pakistani currency and maintaining the financial and economic stability of the country. The term period of directors is on the discretion of the federal government. However, governor and deputy governor are appointed for a period of five years each.

Government authorized state bank of Pakistan to formulate and implement the economic policies to bring economic & financial stability in the country. Therefore state bank of Pakistan performs its all functions only for two concern parties first for government & second banking sector.

FUNCTIONS FOR GOVERNMENT As a government bank the state bank of Pakistan performs the following functions.

1. MONOPOLY OF NOTE ISSUE: The most important function of the state bank of Pakistan is issuance of currency notes. It has monopoly over issuance of currency note. In earlier age this function was performed by commercial banks individually which was inherited with lack of uniformity, loss of public confidence, inflation, and different purchasing power. Therefore state bank of Pakistan authorized to issue currency note to overcome the above evils. Fixed fiduciary system, Proportional reserve system & Minimum reserve system are followed for note issuance

2. CONTROLLER OF CREDIT: The State bank of Pakistan controls and regulates credit money in the country in order to the requirement of the economy. Credit money expansion or contraction has direct relation with inflation or deflation. The state bank of Pakistan control the credit money for keeping the price level stable in the country by using the following methods: Bank rate policy, Open market operations, Bank reserve ratio, Rationing of credit, other miscellaneous methods. 

3. CUSTODIAN OF FOREIGN EXCHANGE: Every country earns foreign exchange through exports of goods and services. This earned and other foreign exchange is held in the custody of the state bank of Pakistan. This is a use to finance the imports of goods & services. When businessmen export goods & earn foreign exchange, which is not handover to them, but it is held with the state bank of Pakistan .The bank pays to them in a local currency.

4. ISSUANCE AND MANAGEMENT OF PUBLIC DEBTS: When the government needed public debts, the state bank of Pakistan, on behalf of it, manages its issuance, payment of interests, & retirement (returns the principle amount on maturity). Public debts are usually issued annually to general public; the government utilizes this cash according to his requirements.

5. DEVELOPMENT OF THE FINANCIAL INSTITUTIONS: The state bank of Pakistan is responsible to develop financial institutions in the country, which play a vital role in industrial, agricultures, and capital development of the country, It also facilitates the establishment and running of money markets and stock of exchange.

FUNCTIONS FOR BANKER The state bank of Pakistan also act as a banker`s bank in the capacity it performs valuable service to its scheduled commercial banks, these are given below. 
LENDER OF THE LAST RESORT: In crisis, when a commercial bank has exhausted all its resources and stills finds itself unable to meet all its obligations the state bank of Pakistan comes forward & provides loans to the commercial banks to enable to discharge its liabilities. Thus commercial bank prevents from bankruptcy one of the ways to help is to rediscount bills of the commercial bank. 
REDISCOUNTING BILL OF EXCHANGE: The state bank of Pakistan rediscount bills of exchange, which means to again discount the bill of exchange, which the commercial bank has already discounted for its clients. Commercial bank discount bills of exchange of businessmen (encashment of the bill before it matures, at a certain rate of interest) as a result commercial banks fall short of cash & they approach the state bank of Pakistan for rediscounting of the same bills. 

CLEARING HOUSE SERVICES: The state bank of Pakistan provides clearing house facility to commercial banks. Every bank receives cheques drawn on other banks, because of which every bank becomes creditor or debtor to other banks. All these cheques are sent to the state bank of Pakistan where it settles & adjusting their debit or credit balances. Clearing service is possible because the state bank of Pakistan possesses cash reserves of the commercial bank.

BANK RESERVES: According to the banking law, every scheduled bank is bound to deposit a certain percentage of all its deposits with the state bank of Pakistan, State bank of Pakistan uses this reserve for many objectives. It provides safety to the account holders, it us used to control credit money. It is used to help scheduled bank in need of cash. It is use to settle banks obligations to one another. The practice which is known as a clearing service.