Question

How do banks mediate between depositors and borrowers?

Answer 1

Banks function as a mediator between the depositors and borrowers in the following ways:-
1]They accept deposits from the depositors.
2]They only keep a small amount of the deposits as cash with themselves in order to pay the depositors who may come any day to withdraw their money.
3]They use the rest of the money to extend loans to borrowers.
4]They charge a higher rate of interest on the loans than they give to the depositors and the difference between the two is their source of income.  This way the banks mediate between depositors and borrowers.

Answer 2

Hi,

Here is the answer to your question,

Banks act as channels for flow of money between those who have surplus and those who need money. People who have surplus money deposit it in banks, with an assurance that they would receive an interest upon the deposits. The banks then extend loans in the market to those who need money at higher interest rates. The logic behind this is that not all depositors would require withdrawing money at the same time. The banks deposit a minimum ratio of their reserves with the central bank of the country, which is known as Cash Reserve Ratio. Thus, banks ensure a circulation of money to keep the wheels of economy running.

Hope this answers your query,

Best Wishes