Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. This is how money lending is a function of the economy. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient.
How Banks Work
Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks. For money lending-related information, you can also contact well good at money lending in toa Payoh central.
Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger.
1. Banks help people to save their money and keep their money in safe custody. To
ensure the safety of their money, people deposit their money with banks. Banks accept
deposits and pay interest on deposits. People have the provision to withdraw their
money as and when they require it.
2. Banks also grant loans to people for a variety of purposes. In times of need
individuals, business houses, and industries can borrow money from the banks.
3. Credit provided by banks is crucial for the country’s growth and economic
development. Credit is needed for all kinds of economic activities, to set up a business,
buy cars, houses, etc.
4. Banks also help people in obtaining cheap and affordable loans. This can help people
to grow crops, do business, set up small-scale industries, trade-in , and also
help indirectly in the country’s development. They should do so so that relatively poor
people do not have to depend on informal sources of credit (money-lenders).
Money is created when banks lend. The rules of double-entry accounting dictate that when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit. In this sense, therefore, when banks lend they create money.