What do banks do with the public deposits? Describe their working mechanisms.
Answers
Banks accept deposits from the public and use the major portion of these deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of these deposits to meet the loan requirement of the people and thereby earn interest. This is, in fact, the main source of income of the bank. In this way, the bank acts as a mediator between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits.
Have a great Day!
Answer: Banks accept deposits from the Public and use the major portion of these deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of these deposits to meet the loan requirement of the people and thereby earn interest.
Explanation:i) Banks keep only a small portion of the deposits as cash (about 15 per cent of their deposits as cash).
(ii) This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.
(iii) Banks use the major portion of the deposits to extend lo
(iv) There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.
(v) In this way, banks mediate between those who have surplus funds (depositors) and those who are in need of these funds (borrowers).
(vi) Banks charge a higher rate of interest on loans than what they offer on deposits.
(vii) The difference between what is charged from borrowers and what is paid to depositors is their main source of income.