Question

How do banks meditate betweenthose who have surplus funds (the depositors) and those who are in need of these funds?

Answer 1

(i)Banks keep only a small proportion of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.

Answer 2

Explanation:

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.