How Banks Actually Work

At first glance, a bank may seem simple: a person puts their money in, and when they need it, they take it out. But banks are not giant vaults that just store the money for future use. They are actually constantly moving, lending and multiplying the money. 

Banks are the middlemen in the entire cycle of money. On one side, people deposit money (your pocket money, your parent’s salary or a company’s profit). On the other side, the bank lends this deposited money to someone who needs it for a home loan or a business starting up. 

However, banks don’t just lend out the exact money you put in. Through a system called fractional reserve banking, they only keep a small percentage of deposits (the reserve) and lend the rest. This means that money you deposit can circulate through many people, fueling more spending and investment than if it just sat in your wallet/account.

For example: 

1. You deposit ₹1000

2. The bank keeps ₹100 (reserve) and lends ₹900 to someone

3. That person spends it, and the shopkeeper deposits it back in the bank → now there’s another cycle of lending. Your ₹1000 has multiplied into much more activity in the economy.

   
   

Of course, this system only works if trust is maintained. If everyone rushed to withdraw their money at once (also known as a bank run), the bank wouldn’t have enough cash on hand. That’s why central banks (like the RBI in India) step in as a backup to lend money, and why deposit insurance exists -  it’s a guarantee that even if a bank fails, you’ll still get back at least a certain amount of your money.

To sum it up, banks are like engines that keep money moving through the economy, turning savings into investments.