The functions of State Bank of Pakistan are governed by the State Bank of Pakistan Act, 1956. In order to discharge its duties efficiently and successfully some of the functions which involved public dealing have been transferred to State Bank of Pakistan Banking Services Corporation from Jan., 2, 2002. The State Bank of Pakistan will continue performing its four basic functions (i) Framing and operation of monetary policy (ii) Regulations and supervision of banks and financial institutions (iii) Foreign exchange management and (iv) Settlements of payments and accounts. The basic functions performed by SBP are now discussed in brief.
1. State Bank as a Bank of Issue. The State Bank has the sole right to issue notes except one rupee note and subsidiary coins which are issued by the Government The Bank adopted the Proportional reserve System for the issue of notes up to December, 19. The level of currency backing y gold bullion, foreign securities is now fixed at Rs 1200 million through an Ordinance in December 1965 This system of rote issue is known as Minimum Reserve System. The size of notes issue reflects the public demand for money. The amount of notes in circulation can be increased to meet the public demand and are adjusted according to the general level of prices and economic activity in the country. The assets of the Issue Department are always equal to liabilities. .
2. Framing and Operation of monetary policy. The State Bank of Pakistan frames and operates the monetary policy. Monetary policy is conducted by the SBP to regulate and control the volume of money and credit supply in the country inorder to achieve specific economic objectives such as price stability reducing unemployment etc. The main instruments of monetary policy are (1) Open market operations (ii) Changing the reserve requirement and (iii) Changing the discount rate.
(a) Open market operations technique is used for expanding or contracting the money supply in the country. By buying the Govt., securities in the open market the SB expands the money supply and by selling securities it contracts the money supply in the country.
(b) Changing the reserve requirements. The State Bank of Pakistan also controls the money supply in the country by changing cash reserve requirements of the commercial banks. An increase in the cash reserve ratio reduces the excess reserves of the bank and curtails the powers of the banks to advance loans. The decrease in the cash reserve ratio increases the cash reserves of the commercial banks which increases the capacity of the banks to advance more loans. The SBP now requires the scheduled banks to maintain atleast 3.5% of demand and time liabilities with it.
(c) Changing the discount rate. The bank rate is the rate of interest at which the SBP discounts the first class bills of exchange. The rise in the l rate pushes up the cost of borrowing of commercial banks and reduces money supply in the country. A decrease in the bank rate works in the opposite direction.
3. Regulations and Supervision of Banks. The State Bank of Pakistan has full powers to supervise and control the banking system in the country. The regulatory powers relate to the licensing of banks and their branch expansion liquidity of assets of the banks management and methods of working of the banks amalgamation and reconstruction and liquidation of banks, inspection of banks etc.
4. Foreign Exchange Management. The State Bank of Pakistan acts as a custodian of foreign exchange reserves manages exchange control and external value of the rupee and acts as the agent of the government in respect of Pakistans membership of the IMF. An important aspect of foreign exchange management is that all foreign exchange transactions are made at the official rate of exchange. It also maintains the exchange value of the rupee in terms of other major currencies of the world.
5. State Bank as a Clearing House. The State of Pakistan acts as a clearing house for the commercial banks. A clearing house is a place where the representatives of commercial banks meet each day to exchange cheques drawn on each other and then settle the differences owed to each other State Bank thus helps the commercial banks in making millions of payments by a minimum of transactions.
6. Adviser to Government. The SBP also acts as adviser to government in all financial matters. Since the SBP is directly involved in the money and foreign exchange markets it therefore tenders advice on all economic matters. It also provides advice to commercial banks and other financial institutions and to commerce and industry in general.
7. Lender of Last resort. The State Bank of Pakistan is the lender of last resort for the commercial banks. If at any time, the banks are short of cash reserves, the SBP comes to their rescue. It provides cash to the commercial banks by rediscounting bills of exchange, Treasury bills. The SBP, thus, helps and maintains liquidity and solvency of the commercial banks.
8. State Bank and Economic Growth. The State Bank is playing a significant role in facilitating and fostering economic development and growth of the banking system and other financial institutions in the country. The main development promotional activities of the Bank are as follows:-
(a) The development of the capital market in the country owes a great deal to the efforts made by the State Bank.
(b) Under the State Bank’s Export Finance Scheme, the commercial banks provide finance to the exporters at the concessional rate;
(c) The State Bank has helped in the establishment of specialized credit institutions for meeting the medium and long term credit needs of the various sectors of the economy. These institutions include IDBP, ADBP, NIT, EFP (Equity Participation Fund) NDFC, HBFC, ICP (Investment Corporation of Pakistan), Bankers Equity Limited, Pakistan Industrial Credit and Investment Corporation, Small Business Finance Corporation.
The following functions which the SBP had been performing and which involved public dealings have been transferred to the State Bank of Pakistan Banking Services Corporation. The new corporation has started functioning from Jan., 2, 2002 as a subsidiary organization to SBP. Its paid up capital is Rs. One billion and is fully owned by the SBP.
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