Question

‘Banks mediate between those who have surplus funds (the depositors) and those who are
in need of these funds (the borrowers)’. Explain the statement with respect to the role
played by the banking system in the economy.

Answer 1

Answer:

A bank mediates between those who have surplus money and those who need money by allowing both to open accounts with it. Banks only keep about 15% of cash reserves to provide to people who come to withdraw money on a daily basis. Those with surplus money are encouraged to invest with the bank and are paid a certain rate of interest for the same. Those who need loans are required to pay an interest on their loans. The difference between payment to lenders and receipt from borrowers comprises the bank’s earnings. Thus, the bank acts as a beneficiary for those with surplus money as well as those who need money.