Definition of Credit
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- Hi Kathy, how are you. No news about you for long time!
- Hi Mark, I am good. I am busy with my new job. I am working in a bank.
- Wow! great. I have to clear some doubts on credits. Could you help me Kathy?
- With great pleasure Mark. Let's have a coffee and talk, come.
- Mark: What is credit in banking, and how it worksKathy: Okay, I will explain in the simplest way.
- The bank credit is the total amount of money that an individual or business can borrow from a bank.
- Suppose, your loan is approved from the SCS Bank. The bank have money channels through depositors, business firms or individuals, or through other products like insurance, mutual funds, bonds etc..
- They outsource that?
- Exactly, they reinvest that money to make more profit. If your loan interest is 5%, the FD customers get 3% interest only. In this way the bank earns money through the difference between what it earns and what itpays.
- Oh, I see. The bank plays an “intermediary” role.. By the way what if may not pay back the loan taken! should the FD holders lose their money?
- No, never. The bank will check whether the borrowers are able to pay back the loans taken as well as pay the interest owed to the bank. Hence, they ask for collateral security while the loan process.
- No, thanksOk Mark. Hope now you have a clarity in bank credits. If any help needed for loans or deposits you can call me.
- waiter: Anything else Madam?
- Sure Kathy, You explained in a nice way. Will meet you again.
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