English-Scared
In India there are different types of loans available , personal loan , home loan , vechicle loan etc..
So Banks earn money in that way.
More over there are many ways of investing money in the bank like keeping an recurring deposit, fixed deposits and many more!
There are even mutual funds in which we invest!
But it is a very big topic. I am not aware of it..
But can you tell how the mutual fund system helps banks?
For example ICICI hasmany types of mutual funds how does it work actually?
I appreciate ES, I am happy that atleast somebody stood up and came for the discussion on the forum. Thanks !!!
ES - You are right that there are n number of loans that bank provides to end customers like you and me. But have you think how bank money out of these.
Do you think that the interest we are paying (complete 8 or 10 or whatever % it is) are the earning of banks?? No it is not.
To provide us loan Banks requires money (liquidity), this is the same money which we deposits in the banks. Bank also gives us some interests on this (Generally its 3.5% for saving accounts in India). So banks profits is;
Profit = Loan interest rate taken - Saving account interest given - Processing fee
You are absolutely right that we have n number of deposit schemes in bank, but just think why banks give us different interest rates on those, like an example: In Indian context if its 4% on 6 month fixed deposit, 7.5 % on 5 yr fixed deposit to 3.5% on saving accounts.
Longer the term of your fixed deposit more would be the interest rate (As banks would be sure that they can use your money for much more time without having tension that you will not ask for your money for that duration. At the same time bank time utilize that money in giving loans at higher rates, Now again, difference in the interest rates is the income of the banks.)
Regarding Investments, Mutual funds... Its a vast topic and I have to start a new thread to explain them. I would do it a little later at-least after explaining the basics of banking.
-CB