How do banks make money? Explain with an example.

Banks make money through the difference between the interest rates they pay to depositors and the interest rates they charge borrowers. Banks pay lower interest rates on savings deposits to depositors and charge higher interest rates on loans to borrowers. This difference in interest rate is a source of income for banks. For example, Anand deposits ₹200 in his bank account. The bank offers an interest rate of 2% on his savings. The bank lends ₹200 to Shreya and charges an interest rate of 5%. Shreya repays ₹10 (5% of ₹200) as interest along with the original loan amount of ₹200, which totals ₹210. The bank pays ₹4 (2% of ₹200) to Anand as interest. Therefore, the bank earns ₹210 - ₹204 = ₹6 as profit. It is important to note that banks have reserve money and do not lend all deposits as loans.