Banks act as a mediator between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers) by lending money to people who are in need. People can open accounts in banks and banks make use of that money to fulfil the loan requirements of the needy people. A higher rate of interest is charged for the borrower and that profit is given to the depositor as interest for offering deposits. This is the actual loan process.
Loan activities of Bank
- Banks keep only a little proportion of their deposits as cash with themselves.
- Nowadays banks in India hold about 15% of their deposits as cash.
- This amount is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day.
- Banks use the majority portion of the deposits to extend loans.
- There is a great demand for loans for various economic activities like vehicle loans, education loans, housing loans, personal loan etc.
- Banks charge a higher interest rate on loans other than what they offer on deposits.
- The difference between the amount that is charged from borrowers and what is paid to depositors is their main source of income for banks.