Explain the concept of loan activities in banks.

People make deposits in banks. However, the banks only keep as mall portion of these deposits as cashwith them (for example, in India, banks hold around 15%of the deposits as cash).They keep this so that any person who wishes to withdraw money on any give day can do so.

The banks use a large portion of their deposits to extend loans to people. Therefore, the deposits made by people who have extra cash are turned into loans for people who need cash by the banks. The banks further charge an interest rate on these loans. The difference between what the banks charge the borrowers and what is paid to the depositors is the main source of the income for the bank, since they charge higher interest on loans and pay less interest on deposits.