With the help of an example, explain the clearing house functions of RBI.

Clearing House Function of RBI — As a clearing house, the central bank settles the claims of commercial banks and enables them to clear their dues through book entries. It makes debit and credit entries in their respective accounts for convenient adjustment of their daily balances with one another.

Example — Suppose, the Bank of Baroda has to pay an amount of ₹20 lakhs to Punjab National Bank. To settle its dues, Bank of Baroda will issue a cheque of ₹20 lakhs to Punjab National Bank. The Reserve Bank of India will then debit the account of Bank of Baroda by ₹20 lakhs and credit the account of Punjab National Bank by the same amount. The settlement is thus completed without actual movement of cash.

Importance:

1. Settlement between different commercial banks can be made conveniently through book entries.
2. The possibilities of cash withdrawals during an economic crisis are reduced.
3. It helps to stabilise the banking system in the country.