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.
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