The business of banking evolved to provide services for business operations. They now provide all kind of services and make money by providing these services. The basic business of banks is to make money. It is their product that they sell in the market they buy it from one customer and sell it to another customer. When they buy it from one customer, they provide incentive to him in the form of interest on the deposit, and when they sell it to another customer they charge interest from him for facilitating him the cash in the time of the need. Banks do not have any product they package money in different formats, be it in the shape of loans, or an insurance product, it is the money which is sold to the customer.
The interest rates that are charged by the banker are guided by the number of people who are in the need of the money and the amount of money that the banks can lend to these customers. The amount available to lend would be guided by the minimum deposit requirements as prescribed by the governments. Another factor that would guide the lending is the fund rate, it being the rate charged by the banks from each other for short term loans that would meet the requirements of the prescribed reserve rates.
The business of lending money to a customer is a risky proposition as the banks are not sure if they would get the money back when it is due or whether they would get it back at all. To cover up the risk of lending, the riskier the purpose, for which the loan is desired, higher would be the interest that would be charged by the bank. The interest that is charged by the banks is a small price that you may have to pay for using money of a person you do not know, and therefore the notion of paying interest to the bank for a loan should not be an entity that should be put into question. Were it to be explained in lay man terms, you would not be able to build a house that you have dreamt about, if you think about doing the same by building up a deposit base in a gradual manner. Your whole life may come to an end, but you may not be able to buy that house.
By: Suman Rai