What is the process through which system of banking operates? Banking is based on the basic maxim of trust. We have this faith in the banks that when we need our money deposited in the bank, bank would pay the same to us. We have faith in the bank that when the check that we have written in favor of an entity or an individual, when is presented before the bank, it would honor the same. Here is a reality check. The money that you keep on depositing on a daily basis in the banks is being lent the same day by the banks to other clients, making income from the money that we are depositing faithfully.
On a daily basis banks lends more credit than the deposits that they have with them. Does it sound some what scary, that the banks are living beyond their means? But if you want an assurance about your money, just walk into the bank and ask for it, and you will get the same. In a normal day if the bank is having about 500 deposit accounts, in the rush hour it so happens that about 200 persons may walk in and demand the money, but still deposit of 300 persons is with the banks. The problem would arise if each and every person who has deposited his or her money with the bank walks into the bank branch and demands to withdraw their deposits.
Though the constitutional provisions in all the countries have mandated that the banks keep a certain quantum as a reserve, if every person who holds the account decide to withdraw the money the reserves of the bank would fall woefully short of meeting the demand. If this happens, then there would be a failure of the bank. All the governments have also laid down norms for the quantum of deposits that has to be provided by the banks to tide over the situation of bank failure. The bank’s success however hinges on the confidence that the customer of the bank has in the ability of the bank to grow on a continuous basis and provide protection to the money deposited by you. The viability and vibrancy of a bank stems from the trust of the customers that they are able to cultivate for themselves, and use it as the building block to expand the operations and attain diversification as well. It is the trust which being the basis building block and the integrity that flows out of it, banks all over the world are governed by regulations in one form or the other by the government.
By: Suman Rai