If I ask you that suppose you got your salary cheque or that you got lucky and won a sum of Rs. 1,00,000/-, what would be the first thing you do? I am sure most of you would say you would rush to the bank to deposit your money! But have you ever wondered how are banks able to give you interest on the amount you deposit? This question is asked too often by people who are curious about improving their banking awareness, if you are preparing for the upcoming IBPS exam, and then this question holds enough importance for you too as it is an important concept to understand from the point of the banking awareness section you would be having in your exam.
IBPSExamAdda.org.in is here with yet another simple and enjoyable module which explains how banks are able to give interest on your deposits. We also have latest banking awareness 2015 material and banking awareness PDF downloads are also available on our site.
If you wish to know more about bank rates visit our previous module which focuses on the inverse relationship between deposit rates and lending rates. Click here to access that module.
Banking Awareness: How do banks give interest on deposits?
The main business of the bank is circulation of money, the bank accepts deposits from the depositors and the same deposits are used to lend money to the public and for other banking purposes. A bank provides many facilities to its customers such as cheques, interest on deposits, loans and so on. Interest on deposits is the amount that the people receive as interest when they deposit their money with the bank. When you deposit money in the bank, your money is not just stored in the vault gathering dust. The money that you deposit in the bank is used by the bank for lending it to other people and for various other purposes. Thus, when you deposit money in the bank you are in a way helping the bank by lending it money. Therefore the bank pays you interest on your deposits in the form of interest.
The money that you receive as interest is paid by the bank after a series of calculations and the interest is paid out of the money the bank received from the depositors. Thus, banks are able to give you interest on deposits out of the money that they receive as deposits from other people. The interest rate is fixed and the bank calculates and gives interest according to the balance in your savings account. Various banks attract people by introducing higher interest rates on deposit, the higher the interest rate, the more people are encouraged to save money. The interest at which the bank gives interest on deposits is called as deposit rate and the interest that the bank receives upon lending money to the people is called lending rate.
Thus, lowering and increasing of interest rates becomes a crucial measure for the Reserve Bank of India or the RBI when it comes to controlling the money supply in the economy. When the RBI wishes to increase the money supply, lending rates are decreased so that the banks give out more money as loans to the people and the money supply is therefore increased. When the RBI wishes to decrease the money supply, the lending rates are increased and therefore people take lesser loans thereby decreasing the money supply in the economy.
To know more about deposit rate and the reason they increase and decrease Click here.
We hope that we were able to help you in improving your banking awareness and brought you one step closer towards realizing your dream of landing the perfect banking job. We wish all our readers all the very best for their endeavors