Economics (NTSE/Olympiad)  

3. Money and Credit

Loan Activites Of Banks

Loan Activites Of Banks
1. Bank keeps only a small proportion of their deposits as cash with themselves. (About 15 % for their provision)
2. Banks use the major portion of the deposits to extend loans. Bank makes use of deposits to meet the loan requirements of the people.
3. In this way Bank mediates between those who have surplus funds and those who are in needs of funds.
4. Bank charges a higher interest rate on loans than what they offer on deposits. The difference between what is charged from the borrowers and what is paid to the depositors is their main source of income.
Credit :
It refers to an agreement in which the lender supplies the borrower with money goods or services in return for the promise of future payment.
Importance of Credit :
1. It helps the people to purchase houses.
2. It helps the businessman to expand their business.
3. The difference between the lending rate and borrowing rate is the source of income for the banks.
4. In rural areas, the main demand for credit is for crop production. There is a minimum stretch of three to four months between the time when the farmers buy these inputs and when they sell the crops. Farmers usually take crop loans at the beginning of the season and repay the loan after harvest. Repayment of the loan is crucially dependent on the income from farming.
Disadvantages of Credit :
1. Banks charge a very high rate of interest which means a large part of earning of the borrowers is used to repay the loan.
2. If the borrowers fail to repay the loan, the bank has the right to sell the assets of the borrowers.
3. If loan is used for unproductive activities the borrower can be pushed into a debt trap.
4. Banks don’t provide credits to the poor people as they don’t have any approved security.


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