Loan Activities of Banks
This section elaborates on the crucial functions of banks in the economy, primarily focusing on their role in loan activities. Banks serve as mediators between depositors, who provide surplus funds, and borrowers, who require funds for various activities, whether personal or business-related.
Banks utilize a major portion of their deposits to extend loans to individuals and enterprises, charging a higher interest rate on loans than the interest paid to depositors. This difference is a primary source of income for financial institutions.
Several scenarios illustrate how loans can foster economic activity, such as a shoemaker named Salim who takes loans to fulfill large orders, contrasting with Swapna, a farmer whose loan leads her into a debt trap due to crop failure. The section emphasizes that the terms of credit, including interest rates and collateral requirements, can significantly impact both the lender and the borrower.
A significant part of credit activity also involves informal lenders, who often impose high-interest rates, leading borrowers into financial difficulties. In response, initiatives such as self-help groups (SHGs) have emerged to provide affordable and accessible loans for those who lack collateral. SHGs allow group members, often women, to save and loan amongst themselves, eventually gaining access to formal banking loans.
Overall, this section highlights the critical role that banks and the availability of credit play in economic development, particularly for marginalized groups in society.