1. What Banks Do with Deposits 💰🏦

• Banks receive deposits from the public, including individuals and businesses, and keep a small proportion as cash on hand for daily withdrawals 💵.
• In India, banks currently hold around 15% of their deposits as cash 💸, ensuring they have enough funds to meet the withdrawal demands of depositors 🏦.
• The remaining funds are used for lending, investment, and other banking activities to generate income 📊.
• Banks also use these funds to provide various financial services, including fund transfers, investment advice, and account management 🧾.

2. Managing Cash for Withdrawals 🏧💵

• Banks keep only a small proportion of deposits as cash because, on any given day, only a fraction of depositors come to withdraw money 🏦.
• This allows banks to manage their daily operations with the cash they hold 🗂️ while still maintaining liquidity for depositors.
• By keeping cash in reserve, banks ensure stability in the financial system and prevent any liquidity crises 🛑.
• They also rely on advanced financial management systems to forecast and plan for daily cash flow, ensuring that there’s enough cash available for unexpected withdrawals ⏳📉.
• The proportion of cash that banks hold can be influenced by monetary policies set by the central bank, such as the cash reserve ratio (CRR), which mandates how much cash banks must keep in reserve 🏛️.

3. Banks as Lenders 💳📈

• The major portion of deposits is used by banks to extend loans to individuals and businesses 💼🏠, fueling economic growth and development.
• Banks provide personal loans, home loans, business loans, and education loans to cater to diverse financial needs 💡.
• There is a huge demand for loans for various economic activities such as buying homes, starting businesses, and other ventures 🏡📈.
• Through loans, banks contribute to job creation, entrepreneurship, and infrastructure development, making them a key player in driving the economy 🏗️.
• Banks assess the creditworthiness of borrowers by evaluating their financial history and ability to repay the loan, reducing the risk of default 📊📝.
• Interest rates on loans can vary depending on the type of loan and the borrower’s profile, influencing the cost of borrowing for individuals and businesses 🏦💸.

4. Bank’s Source of Income 💸💼

• Banks charge a higher interest rate on loans compared to the interest they offer on deposits 📊. This interest spread forms the core of their business model.
• The difference between the interest charged from borrowers and paid to depositors is the bank’s main source of income 💰.
• Banks may also earn income from other services such as transaction fees, investment management, and financial products like mutual funds and insurance 🏦📈.
• In addition to loan interest, penalty fees for late payments and service charges for account maintenance and ATM usage contribute to the bank’s revenue stream 💳💼.
• Investment activities (such as in government bonds or stocks) also generate income for banks, diversifying their revenue sources 📈📉.