How Do Banks Earn a Profit?

Now that we know that banks dont just store our money but use it, the next big question is: where do they earn from? 

The main way banks earn is through something called the “interest spread.” Here’s how it works:

First: What’s an interest rate?

It’s simply the price of money. If you borrow ₹100 at 10% interest, you’ll pay back ₹110. If you put ₹100 in the bank at 4% interest, you’ll get ₹104 back.

1. When you deposit money in a savings account, the bank pays you a small interest rate (say 3–4%). So technically it is like you are giving the bank a loan. 

2. But when the same bank lends money to someone else as a loan, it charges a higher rate (say 9–12%).

3. The difference between what they pay you and what they earn from borrowers is their profit margin.

This difference might look small on paper, but when millions of people deposit and borrow money, it adds up to billions for the bank.

But that’s not their only source of income. Banks also earn from:

1. Fees and Charges: Like ATM fees

2. Services: Like Wealth management

3. Investments: Into government bonds/other safe investments (Which will be explained later.)

This explains why banks are always encouraging us to “open an account” or “take a loan.” They want the deposits to use, and borrowing gives them profit.

Without this model, our economy would stop. Businesses wouldn’t get loans, students wouldn’t be able to afford education, and buying a house would be nearly impossible for many.