All of us know that a lot of money transactions happen in banks, we deposit money, they give us back our money sometimes the same amount at times with interest hence a much higher amount. Just like in the case of fixed deposit, where we deposit a sum for a period of time and upon reaching maturity we get back the amount along with the interest rate. Have you ever wondered why banks take fixed deposits?
Why banks take deposits?
If you are wondering that they use the money deposited in our accounts to make loans, then it’s a clear case of misunderstanding. Banks never utilize our money or deposits to pay other people’s debts. If that is the case, then you must be thinking why are banks always stingy to lend us loans and always come up with excuses of not having the right papers and the like? Banks do not need our deposits to make loans, but they do need it to balance their books. And the cheapest and easy way to balance their books is by attracting more investors and depositors to invest money in the bank or make a deposit.
Your money is safe with banks
Your money is always safe and secure in the bank, you have put your trust in them to keep it safe and they will keep it safe in your savings account, fixed deposit, current accounts etc. This way the cash deposited becomes an asset and the account in the bank becomes a liability. We as depositor have the complete freedom to withdraw any amount at any time as mentioned in the terms and conditions of the bank without any other hurdles. The bank is liable to give it to you at any circumstance.
Role of Reserve Bank
As you know that every country has a central bank which can control and monitor the financial and banking system of that country. In India, the central bank is called Reserve Bank of India (RBI). RBI monitors and regulates Indian banking and financial system by regularly providing guidelines and instructions. They use certain rates like CRR, Repo Rate & Reverse Repo Rate to control the banking system.
Banks can borrow money from Reserve Bank of India (RBI), if they are having shortage of funds, the rate for this is decided using Repo rate. Also banks can lend money to RBI at attractive interest rates, if they have excessive funds with them, these rates are controlled by Reverse Repo Rate.
Indian Banking system is very strong with RBI intervention on all financial and banking issues. So, do not worry while you make a fixed deposit.
Wonderful article!! Indian banking system is really strong looking at the past performances of the banks. The financial losses to bank account holders due to bank closures have been minimal. Also, the interest rates offered by Indian banks are high since it’s a developing economy. Compare this with developed countries where average interest rates are around 3-4%.
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