How do the deposits with the banks become their source of income?

1.	How do the deposits with the banks become their source of income?
Answer» Banks use the major portion of the deposits with them to extend loans. As there is a huge demand for loans for various economic activities, the banks make use of the deposits with them to meet the above loan requirements. In this way, the banks mediate between the depositors and the borrowers. Banks charge a higher interest rate on loans than what they pay on the deposits. The difference between interest rate charged from the borrowers and what is paid to the depositors is, thus, the main source of income for the banks.

Answer»

Banks use the major portion of the deposits with them to extend loans. As there is a huge demand for loans for various economic activities, the banks make use of the deposits with them to meet the above loan requirements.

In this way, the banks mediate between the depositors and the borrowers. Banks charge a higher interest rate on loans than what they pay on the deposits.

The difference between interest rate charged from the borrowers and what is paid to the depositors is, thus, the main source of income for the banks.

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