How do Banks make their Money
Banks are not just a place of withdrawals and deposits, but they are a place of money exchange and business making as well. The Bank serves as a place to make money transactions, money withdrawals, money deposits and act as a place for mortgage as well as a place to borrow money in the form of loans. The question that here people ask from me is “How do banks generate their income”. Well banks are not fools to give anything for free. Banks are just like a kind of share market. They take from you, invest it in someone else and charge interest on this money. The exact process of money making followed by banks can be explained as follows:-
How do Banks make their Money
1. Take Money from you and invest it in someone Else:-
Banks are like a hub of money exchange. You reach a bank to deposit your money. The bank then takes this money and gives it to someone else charging a suitable rate of interest from him say 5% per annum. Now bank pays you back this money whenever you need it with an added sum of interest on your amount but this interest is always less than the amount of interest collected from the borrower by bank say 1%. The difference between both these interest amounts serves to be the earnings of the bank.
2. Accept Mortgages:-
Banks also accept and offer mortgage loans. Suppose if you have a property and you wish to put it as a guarantee in bank to borrow some money from them, the bank readily pays you the amount asking for a suitable sum of interest. It is ok if you pay the interest amount in time, but if you are not able to do that, the bank in turn possesses all your property and sales it in order to recover its amount. This also serves to be an income option for the bank.
3. Give Gold Loans:-
Bank offers gold loan to the customers. Suppose if you have no money but valuable ornaments of gold kept with yourself at home, you can borrow money from the bank in exchange of these ornaments. The bank will pay you the desired sum of amount for which you will have to pay the interest. If you fail to pay the interest, the bank will possess all these ornaments and thus bank will earn in both the cases.
4. ATM Transactions:-
Banks offer services like cheque books, ATM cards, debit cards, credit cards etc. and charge annually or monthly for each of these services and their maintenance. This serves to be another form of income for banks. Some banks also charge you an amount in the form of MAB Charges of Minimum Account Balance charges which you have to pay when you have less than the required minimum balance in your account.
5. Yearly Deductions:-
Banks also charge yearly deductions in the form of account maintenance, more than enough transactions, making online banking, phone number SMS reports etc. All this serves to be a kind of money making procedure for the bank. Some banks even offer insurance services to their customers.