Why Money Lending is necessary

The role of moneylenders has almost reduced, they continue to play a very important role in this system. They are still in a high position and they continue to charge high rates of interest, which is helping make a big profit out of it. Money lending has always been and will be there in most businesses. Money lending is on in many places for example many people are good at money lending in toa payoh .

The modern-day system of finance that includes NBFC’s and banks have made a pit to the profession of lending money by bringing rates down, but this management or institution also makes a good amount of money on the loans they give out, but still, these institutions come under high regulations to ensure people that they are not chasing super-profits anyways.

Individuals who earn under an income above their immediate consumption definitely need to deposit their untouched income in a trusted and reputable bank, thus creating a reserve for their funds. The bank can then take a look at those from the funds in order to loan out those whose incomes fall below their consumption need.

How it actually works?

Above we have talked that the lending capacity of banks is limited by the magnitude of the customer’s saving deposits. In order to lend out more than their capacity, a bank must secure new deposits by influencing new customers. Without deposits, there would be no way to deposit create loans.

The capacity of bank lending is not entirely limited by the bank’s ability to attract new customers for new deposits, but also by the central bank’s monetary system. However, given a particular monetary policy regime increase in reserves. The only way all the commercial banks can increase their lending capacity is to keep safe new deposits, but again deposits create loans, and in continuation banks need people’s money in order to make loans.

Banks in Real World:

In today’s fast-moving generation most money takes the form of deposits, but nowadays rather than being created by a group of savers trust the bank withholding their money.

When a bank makes a loan, there are two entries corresponding to each other that are made on its balance sheet, one on the liability side and one on the asset side. The loan counts as an asset to the bank obviously as it stimulates a newly created deposit which automatically became the liability of the bank to the holder.

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