Fractional Reserve Banking is a common practice used by banks where they take a percentage of the money deposited by customers and loan out the rest.
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Fractional Reserve Banking
Fractional Reserve Banking is a common practice used by banks where they take a percentage of the money deposited by customers and loan out the rest.
Example
For example, if a customer deposits ₹100, the bank may loan out ₹90 and keep ₹10 as a reserve. This reserve is important as it ensures that the bank has enough money to cover the withdrawals of customers who need their money back.
While this system works well when there is trust in the banking system, it can be a cause for concern during times of crisis or loss of investor confidence. If too many customers demand their money back at once, it can lead to a bank run problem. This has been witnessed in recent years with the collapse of banks such as Silicon Valley Bank and Credit Suisse in US.
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