How do the deposits with banks become their source of income?

Banks use a major portion of the deposits to extend loans to people for various economic activities. The interest rates on loans are much higher than what the bank charges on the deposits it has. Therefore, the difference between what is charged from the borrowers and what is paid to the depositors is the source of income of the banks.

NOTE – Deposits are the surplus cash that people hold with the bank in their respective accounts. The bank pays a certain rate of interest on these deposits as well.

Loans are the amount of money given to people who need it for various economic purposes. The major portion of money from the deposits is used to extend loans by the bank. In this case, the borrowers pay a much higher rate of interest to the bank while repaying the loan.