What is the major function of commercial banks?, Microeconomics

They take deposits which mean borrow money and make loans which means lend money. The interest rate they pay on the deposits is less than the interest rate they charge on their loans. This difference covers their overhead costs and profits.

If banks on-lend all the amount of money they receive as deposits, they won’t be able to give any money back to the depositors who come for the withdrawal of money from their accounts. On the other hand, if banks on-lent nothing and kept all the amount of money they receive as deposits in the locked safe, then there will be no profit. There is therefore a trade-off between liquidity which means having cash at hand and profitability. Banks often resolve this trade-off by maintaining the cash reserves which are the small ratio of the total deposits. Therefore if deposits are Rs. 100, banks might make a decision to keep Rs. 10 of that money in the form of liquidity and lend the remaining Rupees 90 as loans to businesses. In this particular case the reserve ratio is 10% (which is 10/100). Sometimes this reserve ratio is forced as the central bank requirement that commercial banks must fulfil.

 

 

Posted Date: 7/19/2012 4:09:50 AM | Location : United States







Related Discussions:- What is the major function of commercial banks?, Assignment Help, Ask Question on What is the major function of commercial banks?, Get Answer, Expert's Help, What is the major function of commercial banks? Discussions

Write discussion on What is the major function of commercial banks?
Your posts are moderated
Related Questions
Compare and contrast the different measures of revenue

Elasticity of Demand This is a measure of how responsive the sales volume of goods is to changes in that product's price, equal to the marginal change in sales, divided by the

Tariff: A tariff is a tax imposed on the purchase of imports. It is generally imposed in order to stimulate more domestic production of the product in question (rather than meeting


Question 1: i) Derive and explain Harberger's (1954) welfare loss estimates of monopolizing a perfectly competitive firm. ii) What are the roles of advertising? Can it lead

Tuan lives in a town with only one movie rental store. Suppose Tuan’s demand for movie rentals per month is Q = 16- 2P . The movie store currently charges $5 per movie, but is thin


Research has revealed the following information about the market for Thomas chocolates; the demand schedule can be represented by the equation Qd=850 @20 dollar. The supply schedul

disadvantages of monopsony

explain main features of short run engineering cost theory