Question

Commercial banks are very profitable, year after year. How do banks maintain such strong profitability? Answer in 4 paragraphs.

Answer 1

Answer : Commercial banks work under the central bank. Generally commercial banks provide loan, deposit and withdrawl services. Commercial banks makes profit by following methods :

Fee : Commercial banks charge fees on checking accounts, debt card and credit card use, late fees, account maintenance fees and some saving accounts are also charged. These fees makes annual profit for Commercial banks.

Loan : Commercial banks provide loans to it's customers with higher interest rate. Customers deposit money in banks for future usations. Customers has right to withdraw money at any time. But it has a limitation which is decided by the bank. This make money for the bank to lend loans. Bank takes higher interest on loan and provide a small part of this interest on customers saving accounts. Thus , banks make profit.

Credit card : Bank charge on credit card usation. Credit card gives the buying power to bank's customers at any time. But banks take interest on it's use which makes money for banks. Bank can charge the interest to anywhere from 15% to 30%.

Add-ons : Banks offer to it's customers for insurance. Customers always want to be secured and hence that accept bank's insurance offer and pay to the bank which makes cost for customers after a period of time. Thus, banks makes a clear profit from add-ons.