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    How Bank Makes Money

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    udaykumar
    Banks make money primarily through lending loans at interest rates higher than what they pay depositors. For example, if a bank lends out $100,000 at 13% interest but is paying 8% to a depositor of $100,000, the difference of $14,860 is the bank's income. Other major ways banks earn money include credit cards with high interest fees, pooling public deposits and loaning them out for additional interest, issuing debt to raise capital, and charging various service fees to customers.

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    How Bank Makes Money

    Uploaded by

    udaykumar
    178 views2 pages
    Banks make money primarily through lending loans at interest rates higher than what they pay depositors. For example, if a bank lends out $100,000 at 13% interest but is paying 8% to a depositor of $100,000, the difference of $14,860 is the bank's income. Other major ways banks earn money include credit cards with high interest fees, pooling public deposits and loaning them out for additional interest, issuing debt to raise capital, and charging various service fees to customers.

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    Banks make money primarily through lending loans at interest rates higher than what they pay depositors. For example, if a bank lends out $100,000 at 13% interest but is paying 8% to a depositor of $100,000, the difference of $14,860 is the bank's income. Other major ways banks earn money include credit cards with high interest fees, pooling public deposits and loaning them out for additional interest, issuing debt to raise capital, and charging various service fees to customers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    178 views2 pages

    How Bank Makes Money

    Uploaded by

    udaykumar
    Banks make money primarily through lending loans at interest rates higher than what they pay depositors. For example, if a bank lends out $100,000 at 13% interest but is paying 8% to a depositor of $100,000, the difference of $14,860 is the bank's income. Other major ways banks earn money include credit cards with high interest fees, pooling public deposits and loaning them out for additional interest, issuing debt to raise capital, and charging various service fees to customers.

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    Major Ways How Do Banks Make Money

    1) Loans:
    Lending loans to borrowers from the public is a major way for commercial banks to
    earn money. These could be personal loan, home loan, car loan and other type of
    mortgages.
    The money lent to a person comes from the money deposits of other customers.
    Banks generally restrict the amount of withdrawals to remain solvent, especially for
    forwarding loans. This ensures that the money remains within the bank.
    The amount is lent to a person at a higher interest rate for a fixed period of time. As
    the loan amount starts getting recovered, the bank pays a portion of the interest
    value to other depositors and keeps the remaining as its earning.
    Issuance of loans creates money.

    Lets take a simple example. Person A does a fixed deposit worth 100,000 with a
    bank @8% annual interest for 5 years. Person B requests a personal loan worth
    100,000 with the same bank.
    After checking person Bs credentials, the bank decides to extend the personal loan
    @13% annual interest for 5 years. The 5-year loan fetches 136,518 to the bank. At
    the same time, the fixed deposit matures and the bank pays 121,658 to person A.
    The difference between the two 14,860 is the banks income.

    2) Credit Cards:
    Credit cards are unsecured loans extended by a commercial bank with the sole
    intention of earning heavy interest.
    Availing a credit card, limited or unlimited value, gives the person access to
    immediate funds and the person is charged premium fees by the bank for extending
    this facility.
    Initially, credit card issuing bank offer low late payment fees for the first year but
    from second-year onwards, the interest rates vary anywhere between 15% and 30%.

    Often, mismanagement of credit cards by the user leads to a huge debt, which ends
    up in a high windfall for the bank.

    3) Public Deposits
    Money kept by the public in various types of savings and checking accounts is the
    largest source of funds for commercial banks.
    The amount accountholders entrust the bank with safekeeping earns them a very
    basic interest amount. These deposits are pooled together and loaned out to other
    individuals or invested elsewhere.
    The banks earn interest money and share the basic percentage with the savings or
    checking accountholder.

    4) Debt Issuance
    Commercial banks often issue debts to raise capital. This is done to maintain
    smooth banking operations and when the need arise; the banks will use sources like
    repurchasing agreements to access debt funding.
    The issuance of bank bonds isnt unusual but they arent a common source of issuing
    bank capital also; the bank bonds are either convertible or callable in nature. The
    debt forms a small percentage of total loans in commercial banks and they arent
    major loanable funds either.

    5) Service Fees
    Commercial banks levy service fees on its customers and even though the service
    fees are marginal, it forms a large chunk of commercial bank earning medium.
    Commercial banks charge service fees for ATMs, overdrafts, operating a simple
    savings account, issuing debit cards, renewing debit cards, accessing internet banking
    and mobile banking, issuing checks, maintaining bank lockers and more.

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