Banking System
How banks create money, manage risk, and serve as the backbone of the modern economy.
How Banks Work
Banks accept deposits and make loans. Here's the magic: when a bank lends ₹90 of every ₹100 deposited (keeping ₹10 as reserve), that ₹90 gets spent and deposited in another bank, which lends ₹81, and so on. This is the money multiplier — banks literally create money through lending.
Types of Banks
Commercial banks serve everyday customers. Investment banks help companies raise capital. The Reserve Bank of India (RBI) is the central bank — it regulates all other banks, sets interest rates, and manages the money supply.
- •Banks create money through the money multiplier effect
- •Fractional reserve banking means banks keep only a fraction of deposits as reserves
- •Bank failures can cascade — this is why regulation exists
- •India's banking system includes public sector, private, and cooperative banks
💡 Did You Know?
About 97% of money in modern economies exists only as digital entries in bank databases. Physical cash is a tiny fraction of the total money supply.