Bank

Principle business of a Bank is pretty simple to understand. It borrows and lends. You and me, the customers of a bank are the biggest lender to the bank. We deposit our money in our bank accounts. The biggest borrowers from the banks are industries, followed by households. Banks, thus, are middlemen. However, unlike the accepted meaning of middlemen, presence of a channel like bank is a must. Banks, in fact, can even even be termed as contemporary ethical साहूकार . As banking is a business, it runs for profit. Banks earn profit employing the good old principle, that Selling price less Cost price should be a positive quantity. In other words, the rate at which bank lends money to its customer, you and me, is higher than the rate at which you lend money to bank. The difference in rate accounts for earnings of the bank, and is the source of salary to its employees and other sundry expenses. The balance amount, after it, is Profit.

Banking, perhaps, is the only business that runs purely on trust. We entrust banks to guard our money that we lent to the bank. Those who infer that banks are a surrogate source of income, derived from interest on deposits, dwell in fantasy land. Except for fixed deposits, the rate of interest on any other bank deposits is always less than the rate of inflation. So, technically, one pays to the bank to keep their money safe; from robbery.

Now, does this mean one shouldn't keep any money in banks? Wrong. One must. Monet and Mind have one thing in common: Both are rendered useless, if kept lying idle. A part of one's fortune must be parked in banks. Rest can be invested into other monetary instruments, including stock, bonds, mutual funds, property, et cetra. The reason for keeping money in banks, especially in checking accounts, is for its easy liquidity, i.e., the funds can be accessed swiftly and with ease. Any other investment avenue doesn't provide similar ease for liquidity.In fact, they can't and should not. Why? Those are investments!

A common misconception about - and for that reason, most financial institutions - is that they have some magical means to multiply investors' money. No one bothers to care where from the interest on deposits is going to emerge from. Profit is a function of efficiency. Either reduce the denominator or increase the numerator. Cut the operating cost or increase the production for same cash inflow. Profit margin is an implication of growth in primary businesses (read agriculture). The ripple effect reaches up to the end consumer, via a series of traditional middlemen. Lesser such middlemen, higher is the amplitude of the ripple at the receiver's end. Retail business will, hence, do more good to consumers and farmers, vis a vis traders.

Any business needs seed capital and till it reaches break-even, some credit। Bank loans are the primary source of such capital influx. Stock markets and Venture Capitalists are other viable options. However, they mostly come into play in big-ticket investments, for such ventures offer higher profit margin, although with high risk factor. Now, if banks are to lend funds to businessmen (and us), obviously, banks itself needs funds. There comes in our deposits. Many depositors, educated or otherwise, feel that banks have a डब्बा in which their money is kept sealed. Whenever they withdraw, the डब्बा is opened and then resealed. In other words, people confuse bank accounts with तिजोरियाँ shown in Hindi films. Never watch Hindi films!

In reality, banks are more desperate for lending out their deposits, for the simple reason that banks lending rates are higher than bank's borrowing rates. Additionally, keeping money idle is akin to keeping a gas burner lighted without putting any vessel atop; waste of energy. The same money, if used for creating permanent assests, viz. roads, rails, bridges, power stations, dams, canals, et al, will results in appreciation of its value; a penny spent today is better than a pound saved for morrow. Moreover, as such projects have high gestation period, the loans are long term and hence promise assured higher return on investment. Stock markets work on smae premise. However, instability is its inherent attribute. Retail investors and financial institutions alike, misuse markets for making quick buck. Markets by definition, may be for trading, but ideally should be for investments.

Bottomline is: Park your money is banks, invest in securities, splurge on your spouse and if you still have balance left, gift it to me!

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Trivia:
I found following trends in the Forbes 2000 biggest companies in the world list-

1. Topmost company belongs to Banking Industry.
2. 4 out of top 10 (40%) companies are from Banking domain.
3. 16 out of first 50 (over 30%) are from Banking domain.
4. 210 companies out of a total of 2000 (over 10%) are from Banking domain.