How a bank actually works
In this chapter: The deposit-loan cycle and why it produces returns · Net interest margin (NIM) and how Indian banks earn · Why your savings rate is so low and FD rates higher
A bank is fundamentally a middleman that borrows from depositors at one rate and lends to borrowers at a higher rate. Your savings account, paying 3.5%, is the bank borrowing from you. The bank then lends that money out as personal loans, home loans, or credit-card balances at 9-30%+. The gap funds salaries, branches, technology, regulatory capital — and shareholder profit.
The headline metric is the Net Interest Margin (NIM): (interest earned − interest paid) ÷ average earning assets. Indian banks typically operate at 3-4% NIM. On a ₹10 lakh deposit base, that is ₹30,000-40,000 of net interest income before any other costs. CASA (current account, savings account) deposits are the cheapest source of funds — banks compete fiercely for them through services, ATM networks, salary tie-ups, and (these days) UPI integration. Term deposits cost more (5-7.5%) but lock in the money for a defined period, helping the bank match its lending tenure.
Different bank business models have very different NIMs: an HDFC Bank vs a small finance bank vs a payments bank look completely different on the same axis. Understanding NIM also explains why the RBI repo rate matters so much for bank profits — when repo falls, lending rates fall faster than deposit rates, compressing margins. Banks with higher CASA ratios (45%+) suffer less from this squeeze.