What is a Central Bank - explained for children

Let’s say you have a piggy bank. So does your sister. Its your birthday, and you want to buy a toy. But when you open the piggy bank, it is 10 rs short. So, you go to your mom/dad and ask for 10 rs to be able to buy the toy. Mom/dad give you that money, but with the promise that you will repay them from the piggy bank as soon as there is enough, or within 10 weeks.

It is the same with banks and central banks. The Central Bank of a country is the “Bank of Banks”. But lending to banks is not its only job. As the banker for other banks, it takes care of many things. We’ll just share the most important ones with you.

1. A central Bank monitors and controls other banks: Suppose your sister is easily tempted and ends up emptying her piggy bank once a week. Mom now steps in and says that she must keep one tenth of her piggy bank earnings with mom, so that she has enough for emergencies and when she really wants to buy something. Central Banks also do the same thing. They monitor how the banks are doing, and whether their actions are leading to too much money in the market. They can make rules for the banks to control both the banks, and the amount of money that should be available in circulation.

2. Banker to the government: The government also needs a bank to manage all that money that we pay as taxes, right? The Central Bank of a country is that banker.

3. Issuing currency: In India, all notes except the Re. 1 note, are issued by the Reserve Bank of India. If you turn an old note around and look carefully, you might find the signature of the RBI Governor on them.