How Banks Earn Money from customer?

How Banks Earn Money from customer?

Everyone deposits their money in the bank. And all these banks also give you interest. Have you ever wondered how Banks Earn Money from customer? Today we will learn how all the banks make money? Let us know what is the business model of a bank.

What does the bank do with the money you deposit in the bank?

We all feel like the bank keeps the peace in the locker. But friends, it is not like that. The bank lends money to another customer at interest. Ex. If you deposit Rs.100 in the bank, the bank will give you 4% interest. And this interest is annual. This Rs.100 of yours is given to another customer through loan. And its interest rate is kept at 8%. Thus 4% profit goes to the bank.

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It can also happen that a customer is not even capable of paying the bank. At that time the money was reserved with the bank. Not all banks keep money. The money is given in loans. That is why the Reserve Bank has made rules. The bank should have 4% of the money deposited by the customer in reserve. These are called Cash Reserve Ratio. And these ratio are determined by the RBI. And that changes over time.

Apart from this there is still a ratio called Statutory Liquidity Ratio. At present this ratio is 18%. Rabbi says that as much money as he wants will have to be deposited there. Such as investment in government bonds, gold reserves, securities, and PSU investment. This means that as much as 78% of the money can be used to give a loan to a customer.

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What if all the customers withdraw all their money at once? At this point the bank will fail. This situation is called bank run. This is not possible for any bank. Because no bank has that much money in cash. But that never happens. But this can happen when the loan given to the customer is not repaid. This has happened with PMC Bank and Yes Bank in the past. But now the situation is under control.

In order to avoid this situation, the bank keeps a limit on withdraw. This has happened to Yes Bank customers in the past.

Interest Rate Difference

Interest is very much needed at night for the bank to earn. In countries like Garman, if you take out a home loan, the interest rate is around 1%. In this case, how the bank earn money? In this case the bank deducts the interest on the savings account. Many banks have an interest rate of 0% on a savings account. The bank pays no interest for the savings account.

The bank, on the other hand, charges separately to save your money. This is how banks charge different types of fees.  The bank itself invests money in different places. Friends, bank valuation is more than a government bank. You can determine how much the bank will earn from the interest rate levied by the bank from its customers. HDFC Bank is a more profitable bank than SBI bank.

what is gross NPA?

How many percentage of the loan given by the bank is deductible. Whenever this ratio goes up to 7% or 8% or 9%, the bank is in the risk.

If you want to open your own bank, you need to have a capital of 500 crores. For that you also have to take permission from RBI bank.

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