Explain any three loan activities of banks in India.

Banks in India play a pivotal role in the country’s financial ecosystem by channelling savings into productive investments. Here are three core loan activities undertaken by these institutions:

1. Reserve Maintenance: Banks maintain a fraction of the total deposits as a reserve. This is a precautionary measure to address any immediate withdrawal requests by depositors. While a portion is kept as liquid cash, the remaining deposits are utilized to grant loans to borrowers.

2. Lending and Intermediation: The primary function of banks is to serve as intermediaries between depositors and borrowers. People with surplus funds deposit their savings in banks. These funds, minus the reserved amount, are then lent out to individuals or businesses in need of financing. Through this mechanism, banks ensure that money in the economy is constantly in circulation, promoting various economic activities.

3. Interest Rate Differentials: The main source of income for banks is the interest rate differential. Banks pay depositors a certain interest rate for keeping their money, which is typically lower than the interest rate they charge borrowers for loans. This difference, often termed as the spread, represents the bank’s profit from the lending activity. To cater to diverse needs, banks offer a spectrum of loan products such as Priority sector loans, corporate loans, housing loans, personal loans, student loans, and more. Each loan type comes with its unique interest rate, tenure, and terms.

In essence, banks in India, while safeguarding depositors’ money, facilitate the flow of funds from sectors with excess liquidity to those with a deficit, fostering economic growth and development.

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