How do banks earn money? Business Model of Banks

All of us save our money in banks and these banks pay us interest on our savings. So have you ever wondered about banks business model? How do banks earn money? How do bank collapse? Let’s read and find it out in today’s blog

Money Earning Sources:

• By Loans/interest

One of the primary ways banks earn money is through interest income. Banks lend money to borrowers at a higher interest rate than they pay to depositors, pocketing the difference as profit. For example, if a bank pays 1% interest on deposits and charges 5% interest on a loan, they earn 4% interest income on the loan.

• Investment

Some banks also earn money through investment banking activities. Investment banks provide a wide range of services, including underwriting securities offerings, mergers and acquisitions, and financial advisory services. These services can be lucrative for banks, but they also carry significant risk.

So these were major sources from where bank earns money!

What if everyone wants to withdraw their money from bank?

If everybody will go to withdraw their money from bank then the bank will collapse! Bank would not have enough money to return. As bank have invested their money to earn profit. Due to this many banks have collapsed like Yes Bank.

That’s why RBI has made some rules and regulations like a person can maximum withdraw 50K from bank, all banks has to keep some percent of cash on each person’s deposit!

So this was the business model of banks!

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