How banks make money

Banks are the backbone of the economy. They have to do well in order to flourish the economy.

The failure of banking sector can lead to a huge financial crisis such as 2007-2008 financial crisis.

Banking is a kind of service type of industry where they keep our money for safekeeping.

The service industries charge us fees for providing service while the banks are giving annual interest on our deposits.

So it is a kind of investment rather than safekeeping.

THEN THE QUESTION ARISES, HOW BANKS MAKE MONEY?
Deposits

We deposit our money in the banks for safekeeping and they give us fixed interest rates on our deposits.

The interest rates are mostly 6 to 7% in a savings account.

There is a fixed deposit type of instrument, where you need to deposit high amount of money to get higher interest rates.

Loans

Banks grant loans to people for their needs, where they also get fixed interest from the loan bearer.

The interest rates are quite higher as compared to depositor’s interest rates.

Suppose a bank has got the deposit of 1 million $ on 6 % interest rates and then they give this money in the form of loans to their customers at 12% interest rate.

So they cover the depositor’s interest and keep the other 6 % as profits.

So the major source of income of the banking sector comes from loans.

NPA

In a condition where loan bearers couldn’t repay the loans, these type of loans is called non-performing assets.

When banks give huge loans to businessmen and they couldn’t repay the debts of them, they fly away.

A lot of these cases are happening in India like Vijay Malaya, Lalit Modi, Nirav Modi, etc.

Because of the non-performing assets, the banks go bankrupt and if they are in public sector then the government would ask the citizens to give their money to them in order to save the economy.

I know it is frustrating that someone breaks and you have to repair.

Fees

Banks charge fees such as maintenance fee, service charge, etc.

In some banks, you need to maintain the monthly balance in your saving account.

Otherwise, they charge minimum balance penalty on your deposit every month.

In 2017, State bank of India collects 1,772 crore rupees as a minimum balance penalty.

However the penalty, fees earnings are very less as compared to loan interests.

So the banks make money mainly on loans.

Read: How to manage money

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Saifullah Khan

Hi there, I am the owner of gloomyworld.com, read more about me here.

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