How Banks Make Money

Yes, the government prints our businesses paper money. But thats just a little small fraction of the money in use. Most of the funds in state economies is made when banks write it directly into their customers’ accounts as a result of thin air as bank loans.

You earn Rs.10,000 and put it in the bank. And then…

The bank keeps RS.1000 in its RBI(Reserve bank of India) account …

This is the “reserve,” which the bank uses when customers withdraw funds. As a rule, depositors don’t take out more than 10% of the money they have on deposit on any given day.

Then loans Susie Rs.9,000, at interest.

Susie deposits the Rs.9,000 in her bank.

That bank keeps 10% (Rs.900) in reserve and loans Joe Rs.8,100, at interest.

See how it all adds up—for the banks.

You now have Rs,10,000 in your account. Susie has Rs.9,000 in hers. Joe has Rs.8,100. 

There’s now Rs.27,100 total in accounts that you and Susie and Joe can spend, and it all came from your Rs.10,000 deposit. The banks have created an additional Rs17,100 by loaning it into existence.

Imagine this money trick over and over.

If you do this operation 50 times, that Rs.10,000 turns into Rs.99500.25—Rs.88500.25 in loans, and your original Rs.10,000.

Mad math: If those loans are for one year at 10% interest, the banks will make Rs.8800.53. If they’d only been able to loan your Rs.10,000, they’d make Rs.1000.