Question

what do the banks do with the deposits which they collect from public

Answer 1

Since the Union government withdrew Rs500 and Rs1,000 notes from midnight on 8 November, banks have been flush with cash, primarily on account of people depositing now-invalid notes in their bank accounts.

With the country’s largest lender, State Bank of India, itself having collected Rs1.27 trillion in cash deposits in the first nine days after the prime minister’s announcement, the total amount of cash deposited in the banking system is likely to be over Rs4 trillion. In fact, it has been estimated by the Indian Banks’ Association that this amount was collected by Tuesday itself.

While a part of this money has been subsequently withdrawn, the imposition of withdrawal limits means that a lion’s share of deposits is still within the banking system. With banks strapped for employee bandwidth on account of heavy public demand to deposit, withdraw and exchange currency, it will be interesting to analyse what banks are doing with the money.

Answer 2

Banks are considered as a sort of business house only where we actually buy and sell money. Money is the ultimate finished good. Depositors viz., public put their money in banks as these financial institutions lure them with high interest rates on deposits. More the number of depositors, more is the money credited and this money can then be used to give loans to other customers for which banks charge interest from them. So, a cycle of exchange follows. It is barter system of money.