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Central bank executes clearing house

Central bank executes the function of a clearing house. Explain how?

Answer: Each and every bank keeps cash reserves with central bank. The claims of banks against one other can be simply and conveniently settled by simple transfers from and to their account. Assuming, Bank A receives a cheque of Rs 10,000 drawn on Bank B and Bank B obtains a cheque of Rs. 15000 drawn on Bank A.The most suitable technique of settling or clearing their mutual claims is that Bank A must issue a cheque amounting to Rs 5000 in favor of Bank B, drawn on central Bank. As an outcome of this transference, a sum of Rs 5000 will be debited to the account of Bank A and credited to account of B. There is no need of cash transactions among the banks concerned. This facilitates cash transaction across the whole banking system, it too decreases requirement of cash reserves of commercial banks.

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