How do banks mediate between those who have surplus money and those wh

1.	How do banks mediate between those who have surplus money and those who need money?
Answer» (i) Banks keep only a small proportion of their deposits as cash with themselves, as a provision to pay the depositors who might come to withdraw from the bank on any given day. (ii) They use their major portion of the deposits to extend loans, mediate between those people who have surplus funds (depositors) and those who are in need of those funds (the borrowers). (iii) They charge higher rate of interest on the 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.

How do banks mediate between those who have surplus money and those who need money?

Answer»

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

(ii) They use their major portion of the deposits to extend loans, mediate between those people who have surplus funds (depositors) and those who are in need of those funds (the borrowers).

(iii) They charge higher rate of interest on the 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.

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