How do Banks work?

Movie Case Study

The scene that you just saw shows, how two people are creating a musical song about Mr. Banks’ life. The lady in the scene is his daughter who is critically listening to the song. This scene from Saving Mr. Banks talks about the role of banks. The opening line mentions that saving in a bank will give you an ample amount of interest semi-annually. This blog, Learning Perspectives will explore how this cycle works.

What is a Bank?

Bank comes from the Spanish word ‘Banca’ meaning “table” and from the German word ‘bench counter’. Benches were used as desks for makeshift counters for exchange during Renaissance.

Traditionally, banks were known to be safe-keepers of valuables, such as grains and metals. Due to the trust entrusted to the banks, the receipt issued by the banks was converted into money. Their role as a guardian soon led them to help people in need by lending the depositors’ money on interest.

Banking Regulation Act of 1949 defined banking as “accepting for the purpose of lending and investments, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”

When you go to a bank and say want to deposit Rs. 50,000 in SB (Savings bank) Account, banks feel obliged and quickly take your money and take it in their custody. They in fact would pay you some interest on it as well. How does a bank do this? What are they gaining?

How do Banks work?

When you went to deposit this money. At the same time, your neighbor also went to the bank to ask for a loan of Rs. 50,000. Essentially bank took the money from you and gave it to your neighbor on the condition that he returns the money within 1 year with interest of say 10%. Bank gives you 4% interest on your savings bank account (for depositing money in the bank) and earns a spread of 6% (10%-4%). It is also called Net Interest Margin, which happens to be the main income for banks.

If you listen to the song carefully, it goes on to mention different services that the banks provide such as first and second trust deeds, foreclosures, bonds, dividends, shares, debtor sales, opportunities, amalgamations, etc.

Banks have ventured into many other services as well in today’s time. From managing the company’s portfolio to retail wealth management. Banks offer a varied amount of services and investment options to their clients, both corporate and retail.

Understand Banks with a Video