Banks provide host of services to ease the process of conducting of your day-to-day financial affairs and as a charge for this facilitation banks levy a service fee on you. It could be for the check book that has been issued to you, the duplicate statements that you might have asked, the inter-city checks that you may have issued whose collection has to be done by the banks and so on. The protection on an overdraft that you have taken from the bank is a service, for which the bank charges a notional service charge from you. Banks also provide various investments services and securities as well, and this is another source of income for the banks.
It needs to be clarified once again that the banks do not have any money of its own out of which it generates income. The income is generated from the money deposited with it. Banks take a signature from the borrower on the loan document which is a form of commitment to pay the money that has been borrowed, along with the interest levied thereon. Banks also take some kind of a security as securitization of the loan that they extend, or they mortgage the property or the entity or the unit created out of the loan and hypothecate it in its favor, till the time the loan has been liquidated. Credit card is an exception, as in its case there is no collateral security. To cover up for the same, banks charge very high rate of interest from the credit card users if the dues are not cleared.
The agreement that has been entered into becomes a promissory note and is converted into a Negotiable Instrument or a cash equivalent. The loan process is put into operation by opening a bank account in the name of the borrower and by depositing the amount as cash equivalent into the account of the borrower. This money that is deposited is an asset on the books of the banks and it is loaned to the borrower and an interest is charged on it.
By: Suman Rai