How does bank mediate between those who have surplus money and those who
need money?
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• Banks keep only a small proportion of their deposits as cash (15%)
with themselves to pay the depositors who might come to withdraw the
money from the bank on any given day.
• Banks make use of these deposits to meet the loan requirements of
people.
• In this way banks mediate between those who have surplus money
(depositors) and those who are in need of funds (borrowers)
• Banks charge a higher rate of interest on loans than what they offer on
deposits.
• The difference between what is charged from the borrowers and what is
paid to the depositors is the main source of income for the banks.
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