Banks keeps approximately ______ percent as a provision to pay the depositors who might come to withdraw their fund
Answers
When money is released by the RBI (Reserve Bank of India) into the economy, it goes into circulation through transactions. The government may pay the people it employs, buy goods and services, give subsidies, and so on. Part of this money is kept by the recipients and the rest goes back into bank accounts. A government servant who receives a salary keeps a fraction of it at home and puts the rest in his bank account to earn some interest. The businessmen who sell their goods or services to the government and get money in their bank accounts use only a part of that to carry on their business, while the rest stays in the bank.
One can see that most of the money released into the economy keeps going in and out of the commercial banking system where businesses and households maintain their accounts. The banks have to pay the depositors some interest for keeping their money with them. They too now need to earn some income to pay this interest. They do so by lending the money they get to those who need it for various purposes. I may be setting up a plant to produce some item and may need long-term capital. I may need to set up an office to provide services. I may need capital to pay wages to my workers and also to buy raw material. A part of the profit earned by my business is paid to the banks as interest for the loan I have taken. What this means is that a bank does not have the money that its depositors deposited with it. If all the depositors come to a bank and want to withdraw their deposits, the bank would not be able to pay them. This is called a “run” on a bank, and such a bank fails. This is where the RBI plays the role of a banker to the banks, giving money to the banks.
Banks keep approximately 15% as a provision to pay the depositors, who might come to withdraw their fund...