How do banks mediate between those who have surplus money and those who need money?




Dear student,

Banks mediate between those who have surplus money and those who need money in the following ways:

a. Banks keep a minor portion of the deposit as cash.
b. The major portion of the deposit is utilised for extending loans.
c. Banks maintain a balance  by accepting deposits and advancing loans and mediate between those who have surplus funds and those who are in need of these funds. 
d. Banks also charge a higher rate of interest on loans compared to the one they offer on deposits.

Regards.

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Dear student,
please find the answer.

Banks use the major portion of deposits with them to extend loans to people who need money. There is a huge demand for loans for various economic activities. In this way, banks mediate between those who have surplus funds and those who are in need of these funds. Banks charge a higher rate of interest on loans compared to what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income. Thus, by accepting deposits and by advancing loans, banks mediate between those who have surplus money and those who need money.    

hope this helps.
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