đŠ FINANCE SERIES â PART 2
Hi guys! đ
In Part 1, we learned what money is and how the financial system works.
Now let's understand something we interact with almost every day:
đ How do banks actually make money?
You deposit money in a bank, the bank may pay you interest, and somehow the bank still makes a profit.
So where does that profit come from? đ€ Let's break it down simply.
đŠ 1. THE BASIC BUSINESS MODEL OF A BANK
A bank mainly acts as a financial intermediary. In simple terms:
People & businesses deposit money â Bank manages those funds and raises money from other sources â Bank provides loans and other financial services â Bank earns interest and fees
The difference between what a bank earns and what it pays out, along with its operating costs and other income/expenses, helps determine its profit.
đ° 2. THE BIGGEST SOURCE: INTEREST
One of the major ways banks earn money is through lending.
Imagine you deposit âč1,00,000 in a bank. The bank pays you interest on your deposit. Now imagine another customer takes a loan from the bank. The bank charges that borrower a higher interest rate.
For example, purely as an illustration:
âą đŠ Bank pays a depositor: 6%
âą đł Bank charges a borrower: 10%
The difference is called the đ NET INTEREST MARGIN (NIM)
Of course, a real bank's economics are much more complicated because it has funding costs, operating expenses, credit losses, capital requirements, taxes, and many other factors.
đ 3. WHAT IS NET INTEREST MARGIN?
NIM is an important banking concept. Very simply, it measures the difference between the interest a bank earns on interest-generating assets and the interest it pays on its funding, relative to its interest-earning assets.
Example: Suppose a bank earns âč10 crore in interest. It pays âč6 crore in interest. The difference is âč10 crore â âč6 crore = âč4 crore.
That doesn't mean the bank's final profit is âč4 crore. The bank still has to pay for employees, branches, technology, bad loans, marketing, taxes, and other operating expenses.
So interest income â interest expense â final profit.
đł 4. BANKS ALSO EARN FEES
Interest isn't the only source of revenue. Banks can earn fees from services such as credit cards, certain payment services, account-related services, loan processing, foreign exchange services, and investment and financial services. The exact fees depend on the product, bank, and regulations.
đ 5. LOANS ARE A MAJOR PART OF BANKING
Banks lend money for many purposes: home loans, vehicle loans, education loans, business loans, personal loans, corporate loans. The bank earns interest from these loans. But lending also creates one of the biggest risks for a bank.
â ïž 6. WHAT IF THE BORROWER DOESN'T REPAY?
This is called CREDIT RISK
Suppose a bank gives âč10 crore in loans. If some borrowers stop making payments, the bank may suffer losses. That's why banks carefully evaluate borrowers.
They may look at income, employment/business stability, credit history, existing debt, collateral, and ability to repay. Banks also set aside provisions to absorb expected credit losses.
đŠ 7. WHY DON'T BANKS JUST KEEP ALL THE DEPOSIT MONEY?
Because banks are not simply giant storage boxes for cash.
#BinanceLaunchesBinanceIntelligence #WinklevossFilesSpotZcashETFApplication #SouthKoreaAITradeLiftsWorldcoinTo$7.41B
