The Cost Case

The survival of banks depends on lending money. Naturally the money the banks lend brings interest and this interest is the one, which keep the banks floating. Thus lending of money gives them the incentive to offer their customers loans to the full amount permitted by the Central Bank. As a result the bank always wants to keep fully loaned up status. The banks also have a pressure from the Central Bank as according to the rule the commercial banks are supposed to retain a certain proportion of reserves. Thus to keep this reserve without fail, the banker do all the borrowing and lending of money and at the same time the supply and demand of money is kept in mind.


"Whatever the system, it is important that we should have the right quantity of exchange medium, or nowadays, credit, to satisfy the needs of the economy in its current or potential level of activity. Indeed it is by regulating the amount of credit available that the level of economic activity can be controlled. To expand the economy we increase loans, overdraft and credit facilities to business and consumers. To slow down the economy we reduce the level of credit available"


Since people are not in a position to have all the goods and services they want so they have no choice but to choose from the available commodities. This is how demand is created. In the same way money is never in abundance and therefore the scarcity makes it the most demanded commodity in the world. When the supply or demand changes, the prices send their signals and at the same time provide incentives to prospective buyers and sellers. As a result the market prices are adjusted according to affecting incentives.


Interest is the cost of obtaining credit. It may also be called the return paid to owners of capital. The customers of a bank are very much interested in the amount of interest they receive by the end of the fiscal year. There occur many variations in the annual rate of interest. The main cause may be: Length of loan: The longer the loan period, the greater will be the interest rate charged. If the risk is greater for non-repayment of the loan, the greater interest rate will be charged.