Bank of Central Clearance ,Settlement and Transfer

This function was first developed by the bank of England toward the middle of the nineteenth century. In 1954, a scheme was adopted for setting the difference between various banks at the end of daily clearing through the transfer entries between the accounts of different banks kept at the bank of England. This function of clearance, settlement and transfer of mutual claims . which was evolved as a method of practice, became in course of time ,an accepted normal functions of the central banks as bankers bank. Some central bank performed this function because it found place in their laws or articles of association and memoranda. For instance the central bank of Chile was required to act statutorily as a clearing house for member banks in Santiago and other cities of the republic in which it has branches. The bank of Columbia was also similarly enjoined one of the purposes of the reconstituted reichs bank and of the national bank of Austria and Hungary, as mentioned in their laws was to facilitate the clearance of payments today, the clearing function is an essential function of a central bank stressing this function of the central bank Shaw asserts that central bank will operate as the clearing house for all its member banks as mere matter of mechanism or book keeping. According to kisch and Elkin it is necessary for the central bank. To set up an expeditious and economical machinery for the clearance of drafts and settlement of internal accounts. Because in its capacity as holder of the balance of the commercial banks a central bank is specially qualified for this duty. According to Jauncey clearing is the main operation of central banking. Willis also holds that the clearing function with its ancillary element is among the most significant of central banking functions and is one for which only a very incomplete substitute may be found through resort to other expedients.

Since commercial banks keep their surplus cash reserves in deposits with the central bank it is far easier to clear and settle claims between them by making transfer entries in their accounts maintained with the central bank than if each commercial bank entered into separate clearance and settlement transactions with other banks individually. Much of labour and inconvenience experienced in the individual system of clearance and settlement is avoided when central bank enters into the picture as a central clearing agency. The process of effecting settlement between the banks in the books of central bank while comparatively simple to operate is of great convenience to the banking community as it the economises the use of money in the banking operations. Willis has very able highlighted the significance of clearing and settlement function performed by the central bank in these words . it is not only a means of economising cash and capital, but is also means of testing at any time the degree of liquidity which the community is maintaining a matter which is essential for the central bank to know from day to day. He goes to the extent of stating that the attitude adopted ( throughout his books) has been that of treating clearance as test of liquidity and that the bank performs its characteristic function by determining what classes of goods are to be admitted to the field of exchange and the process of clearing indicates the extent which the judgements which have thus been registered by the bank, have been sound or at least in accordance which the judgements of other elements in the productive process of the community.