Banks mediate between those who have surplus money and those who need money by acting as a financial intermediary : they collect idle funds from savers and channel them as loans to borrowers, while earning a spread on the interest rate.

How banks collect surplus money

  • People and businesses with extra income deposit their money in savings, current, or fixed‑deposit accounts.
  • Banks pay interest on these deposits, so savers earn a return while keeping their funds relatively safe and liquid.
  • Banks keep only a small fraction (often around 10–15%) as cash reserves to meet daily withdrawals; the rest is used for lending and investments.

How banks provide money to those who need it

  • Banks pool the deposits from many savers and lend them out to individuals, firms, and governments that need funds—for example, for homes, education, business expansion, or infrastructure.
  • Borrowers must repay the loan with interest , which is usually higher than the interest paid to depositors.
  • The difference between the interest earned on loans and the interest paid on deposits becomes the bank’s main source of income.

Why this mediation matters

  • Banks reduce the risk for both sides: savers do not have to directly search for trustworthy borrowers, and borrowers do not have to approach each individual saver.
  • By moving money from idle accounts to productive uses, banks help allocate capital efficiently , which supports investment, jobs, and overall economic growth.

Simple illustration

  • Saver A deposits ₹100,000 in a bank and earns 4% interest per year.
  • Bank lends that ₹100,000 to Borrower B at 9% interest per year.
  • Bank’s spread is 5% (₹5,000), part of which covers costs and profit, while the rest helps pay interest to Savers like A.

Information gathered from public forums or data available on the internet and portrayed here.