Question

Explain the loan activities of Banks?

Answer 1

Loan activities of the bank

1. Banks keep a small proportion of their deposits as cash with themselves to pay the depositors who might come to withdraw money from the bank on any given day.
2. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.
3. Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
4. Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
5. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.