Loan Activities Of Banks

Loan Activities Of Banks

• What do the banks do with the deposits which they accept form the public?
• Banks keep only a small proportion of their deposits as cash with themselves.
• For example, banks in India these days hold about 15 per cent of their deposits as cash.
• This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.
• Since, on any particular day, only some of its many depositors who might come to withdraw cash, the bank is able to manage with this cash.
• Banks use the major portion of the deposits to extend loans.
• There is a huge demand for loans for various economic activities.
• Banks make use of the deposits to meet the loan requirements of the people.
• In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds. (Investors)
• 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.