Question

How do banks mediate between those who have surplus money and those who need money?

Answer 1

• Banks mediate between those who need money (borrowers) and those who have surplus money (depositors).
• Major part of the deposits available with the banks are given as loans.
• Only a small proportion of deposits received by banks are kept as cash with themselves.
• 15% of the deposits are held as cash by the banks in India.
• Depositors who might come to withdraw money from the bank on any given day, these deposits are given by the bank to pay them.
• The bank is able to manage with this cash, even when they have a large number of depositors, since only some depositors may come to withdraw the cash.
• For various economic activities and other reasons, there is a huge demand for loans.
• Hence to meet the loan requirements of people, banks make use of its deposits.