How the banks give loans?
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Gaurav Seth 6 years, 8 months ago
1) Banks keep a small proportion of their deposits as cash with themselves to pay the depositors who might come to withdraw money from the bank on any given day.
2) Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
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