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How do banks make money?

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Every time when we think of banks, most of you often had a question arise in you head, also me. That is ” How does a bank earns money??” They have employees and buildings and various liabilities which consumes their money. If all these are kept aside, they also give loans and interests to their depositors!!. So after so much expenses how do they earn?. Lets find out now.

At the end of this article you will understand:

  • How a bank earns
  • Charges in banks
  • Glimpses of Interest rates

Basically there are 3 main ways of bank income: Income through interest rates, Fees on various banking services, Currency exchanges etc.

What do you get when you deposit you money in the bank?

1. Obviously Interest, Now the interest rates varies from different in various instruments, we will learn about it in a dedicated article on interest rates. Now, If you don’t know bank also takes interests from its borrowers!! Yes, when banks lends money to anyone they have to give an extra amount on EMI or any other basis. This is also call loan interests or interest rates, rates vary from 8% to 12% in India. Here you can see the difference, when we deposit our money bank gives an interest of 3% to 6% where else when we take a loan we have to give much more interest. Here the difference of the rates is one of the source of income of bank.

2. Fees and charges: Banks also makes money by deducting few types of charges from their customers. Like ATM cash withdrawl charge, account maintenance charges, money transfer charge, late payment charges, NSF(not sufficient funds fees) etc. You may have a doubt that the fees or charge amount is very less or negligible ..like 0.1% or so, then how does they earn from it?? The answer is simple, it is Maths, like they are deducting very less charge for a huge amount of people.

Example: SBI bank in India has a customer base of 420 million or 42 crore. Imagine deducting a very small amount of charge from ever half of their customers!!. You got the answer.

3.Bank Services: It also earns money by providing various services, like mutual funds, wealth management, insurances, investment management, government ID updation services etc.
As the point says it, when you buy any insurance or mutual funds it works as a profit for the bank.
We will learn more about insurances in another blog.

SO in this article we understood about how does a bank earns its money for its expences in a very simple manner. There are numerous more questions regarding banks and I am trying to cover all of them in an organised way.

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