Introduction
Have You Ever Wondered How Banks Make Money? How Does It Multiply Your Money And Where Does Bank Make Maximum Profit, What Are Bad Banks, And What If a Bank Goes Down? If Yes, Your Answer Is In This Blog.
Working Of A Bank:
So Let's Say There Is A Person Who Needs Return On His Money. On The Other Hand, There's A Businessman Who Wants Fund To Start His Business But It Is Impossible For Him To Go To Every House And Ask Them If They Want To Lend Some Money. This Problem Is Solved By The Bank. Banks' Primary Function: To Take Funds From Households And Pay Them Interest. On The Other Hand, Lend It To Business Firms. But Then The Question Arises How Do Banks Make A Profit?
How Does A Bank Earn:
The Difference Between Interest Charged By Banks And Paid To Its Clients Are Profit For Banks. For Example, Let's Say There Is A Person Who Goes To A Bank And Deposits Money Worth Of 100000 In Km Bank For Interest Of 6% Per Annum. And There Is A Person Who Wants To Start His Business And Needs A Loan Of 50000 So He Borrowed Money From Bank At Interest Of 9% Per Annum. So The Left Over 3% Is The Profit For Bank Also Makes Money Through Various Other Activities. As Spread. But What Actually Is The Biggest Asset For A Bank?
Biggest Asset For Bank:
The Biggest Asset For Banks Are Current Accounts. As They Can Lend That Money To anyone who fulfills the requirement of the bank. But a twist in the story arises when the depositors of the current account do not get interest but in many cases, they have to pay fees. Instead, They Charge Fees From The Depositors For The Same. But What Is A Current Account?
WHAT is current A/c
Current Account Is Used For Transferring Of Funds By Businessmen But The Transfer Of Funds Only Happens On Paper, In Reality, The Real Amount Of Funds Are Kept With Banks. This Function Is Performed By Clearing House. So basically clearing house is a government organization that settles all the transactions between banks. there are millions of transactions in a day. so to pay each of the banks physically is impossible so to do that clearing house dr and cr the amount accordingly for eg their is a customer of Lal Chand bank transfer its money to its supplier whose bank a/c is in Ram Chand Bank and he against transfer his money to his supplier whose bank a/c is in Lal Chand bank.So at last all banks have the same amount of funds.
What If Depositors Start Taking Out Cash?
From The Past Experience Banks Know That All Depositors Will Not Withdraw Money Together. But If It Happens Like Yes Bank. So To Come Out Of This Situation And To Keep Public Money Safe. So RBI Has Set A Ratio Known As Reserve Ratio Which The Rbi Sets. Reserve Ratio Has Two Parts Which Are The Statutory Reserve Requirement This Ratio Is Maintained By Banks And Legal Reserve Ratio By Rbi. But What If Bank Goes Bankrupt?
Why does a bank go bank corrupt:
the reason for a bank to go bank corrupt is its Non-performing assets. So Basically Npa In Banking Is The Loan Taken By A Person But Is Unable To Repay It. But when it extends to large borrowers banks go bank corrupt as no one wants to keep money with a bank where there is no guarantee that their money will come back
But What happens to the money of depositors if a Bank Goes Bankrupt:
Each Depositor In A Bank Is Insured Upto A Maximum Of ₹ 5,00,000 (Rupees Five Lakhs) For Both Principal And Interest Amount Held By Him In The Same Right And Same Capacity As On The Date Of Liquidation/Cancellation Of Bank's Licence Or The Date On Which The Scheme Of Amalgamation/Merger/Reconstruction Comes Into Force.
What Are Bad Banks:
The Name Bad Bank Suggests That It Is A Bank Which Is Bad. But Actually, It Is A Saviour For All The Banks. Mckinsey Outlined Four Basic Models For Bad Banks. But What Are Bad Banks? the non-repayment of loans by NPA( Why does a bank go bank corrupt:) results in seeing the security of loans kept by the bank. But In In case Of Loan Default Bank Does Not Have Time To Sell The Security And Is Unable To Focus On Its Core Business That Is Borrowing And Lending. So To Solve This Our Honorable Finance Minister Came Up With A Solution That Is It Created A Company Known As National Asset Reconstruction Company Ltd(Narcl) Which Purchases The Guarantee By Bank Of Those Who Does Not Pay Their Money Back. The Company Pays The 15% Amount At The Time Of Purchase And 85% After Selling The Guarantee. India Debt Resolution Co. Ltd (IDRC) This Company Of Government Sale The Asset.
Bad Banks Help Banks To Improve Its Image And Mainly Focus On Its Core Function.
Conclusion
Banks Are Integral Part Of Economy Which Act As A Middle Man In The Economy Without Banks Economy Can Be Imagined. I Hope This Blogs Helped You In Understanding How Banks Work. The government Is Also Making a Significant Contribution So That Banks Maintain the Economy.
question of the day :
which is the biggest bank in India?
NICE BRO👍