Why Are Banks Special
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Why are banks special? When I look at a bank I look it in two different platforms. First, where it is a physical institution and second, it is the oil in the ec onomic machine. Obviously both the functions are subset of each other. As a physical institution it provides the services to its customers and indirectly running the economic machine. On the contrary, when it is p laying the role of oil in the economic machine then it provides services to economy as a whole by i ndirectly serving to its customers. Like economics has two fields micro and macro similarly according to me bank also have duo role to play macro and micro. Banks are special because of the various types of services they provided. These services can be different for different groups of people in the economy, but it is because of those services that banks are of utmost im portance. One of the most important function of the bank is that th ey accept deposit. Banks are the only institution who is allowed to accept deposit. The que stion which arises is that why do people deposit? People deposit because they want to be shielded against the uncertainties of future. Going a step ahead, why do the uncertainties arise? Because of the change in time value of money. And to overcome this uncertainty bank provides interest on the deposits which is arrived after the adjustment with the inflation rate of the country. Banks are important because it is the intermediary between two most important entities in any economy i.e. Firm and Household. The above chart explains that household gives deposits to the banks and banks forward the deposited amount to the firms who are in need for the loans and firm uses these money to invest in some projects and pays the money back with interest to the bank. Bank keeps some percent of interest with themselves to perform the day-to-day functions and pays the rest to the depositors. FIRM BANK HOUSEHOLD deposits Loans Interest Payment Interest Payment
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Transcript of Why Are Banks Special
8/11/2019 Why Are Banks Special
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Why are banks special?
When I look at a bank I look it in two different platforms. First, where it is a
physical institution and second, it is the oil in the economic machine. Obviously
both the functions are subset of each other. As a physical institution it provides
the services to its customers and indirectly running the economic machine. On
the contrary, when it is playing the role of oil in the economic machine then it
provides services to economy as a whole by indirectly serving to its customers.
Like economics has two fields micro and macro similarly according to me bank
also have duo role to play macro and micro.
Banks are special because of the various types of services they provided. These
services can be different for different groups of people in the economy, but it is because of those services that banks are of utmost importance. One of the most
important function of the bank is that they accept deposit. Banks are the only
institution who is allowed to accept deposit. The question which arises is that
why do people deposit? People deposit because they want to be shielded against
the uncertainties of future. Going a step ahead, why do the uncertainties arise?
Because of the change in time value of money. And to overcome this
uncertainty bank provides interest on the deposits which is arrived after the
adjustment with the inflation rate of the country.
Banks are important because it is the intermediary between two most important
entities in any economy i.e. Firm and Household.
The above chart explains that household gives deposits to the banks and banks
forward the deposited amount to the firms who are in need for the loans and
firm uses these money to invest in some projects and pays the money back with
interest to the bank. Bank keeps some percent of interest with themselves to
perform the day-to-day functions and pays the rest to the depositors.
FIRM BANK HOUSEHOLDdepositsLoans
Interest
Payment
Interest
Payment
8/11/2019 Why Are Banks Special
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One of the other reasons why banks are special is that it helps in credit creation.
It gives various facilities like overdraft, loans etc to keep the economic cycle
moving. As result of credit creation the economy as a whole grows and gets
more exposure to credit money which is invested in newer projects which help
in improving job opportunities, technological advancement etc. as a result of the
credit given more money is generated in the economy. As a result of which
there is circulation of money in the economy. Banks acts like a regulator as it
increases or decreases the interest rate seeing the inflation of the country.
There are many other functions of banks which are the reasons for banks being
special like agency functions, utility functions etc.
With the advancement of technology the question which now arises is that, Are
banks still special?
Continuing my discussion from the first paragraph, we see banks in two ways
first as a physical institution. With the technology advancement and added
functions of ATMs it is now said that ATMs are the bank in itself. As it
virtually do all the functions of bank which a bank as a physical institution used
to do. However, the bank will still be the catalyst by performing its functions in
the economic machine.
KUNAL BHODIA
FSB2013002291
