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Banks: What are they? How do they work? why banks?

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In this article we are going to learn about banks and its functions or systems.
At the end of the article you will be able to define and understand about where is your money going?? And various questions related to bank which were never answered during our school time.
First of all, Before digging into the core of the systems let’s understand “What is a bank”. You would think that “its easy ….tell us something new!!” But wait…Let’s learn from basics so no questions are left in the end!!

What is a Bank?

In most simple words: Bank is the place where we keep our money OR store it and Borrow money. A bank is a financial institution licensed to reserve deposits and give loans.Today most banks also provide various more services like insurences, Gov. IDs(Aadhar etc), Mutual Funds ,Wealth management, Currency exchange etc
There are several types of banks, we are going to learn and understand evereyone of them.
I think that we have understood in simple words that what a bank is? Now let us move forward and clear some of our doubts related to banks.

Where our Money goes When we deposit money in the bank?

Many of us think that when we invest or deposit money in a bank, our money is just kept in the locker or any giant safe locker. But this is not true!! This does’nt mean that your money is not safe. It is kept in safest possible lockers but, the money we deposit is “used by the bank”.
Now after reading this many of you would have been confused and devastated. Rather then solving your question, probably more questions arised in your head.
Why and for what bank uses our money!!? Is has a simple answer, which is itself a question again. The bank gives loans!! Its that simple. When you take a loan from bank, then bank does’nt share its own treasury or money to give you loan. It uses the money of depositers.

Even bank does’nt even have their own money, maximum amount they have is deposited by only us!.

Another question arises:

Why does banks give loans? If they don’t have their own money then why they are borrowing money which does not belongs to them?

Ever thought, How does a bank earn? Once again the answer to the question, that why does bank gives loan, is again itself a question.
Yes!! You read correctly. In a very simple manner think that at what rate does bank gives you loan? It generally varies between 8% to 13% or more in India. And at what rate do you deposit your money in banks(FD or savings account etc)? This generally varies between 3% to 6% in India!!
So, above point says in a very simple manner that how does a bank earns, It is the difference between the loan rate and the deposit rate. Obviously this is not the only one way of earning ..There are several other ways, we have a dedicated article on how does a bank earns money, click here.

Till now we have learnt about what a bank is, and some of its basic functions. In upcoming articles we will learn about what are the basic instruments of banks like Fixed deposits, savings accounts and more.

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