Imagine a world without banks and question yourself how do you transact with other people ? For every small or large purchase you need to carry hoards of cash, you have to physically present for delivering the cash in exchange for goods. You cannot sleep well at home because of risk of being burgled. At the end, you simply cannot do proper commerce that helps you win your bread and butter. I always remember the days when I used to wait for a friend or relative to visit my college so that my parents can send my college and tuition fee. Anywhere banking and even ATMs were not prevalent in India till 2003.
What is Banking
Banking can best be described as movement of money from those who have excess to those who have shortfall. Banks act as intermediaries between these two set of people and enable transaction between them. Bank’s main objective or mantra for survival is rotation of money. When this rotation stops, banks collapse. The impact and reach of banking is so deep that everyone gets affected by it in one way or the other.
Why economies rely on Banks
Banks acting as enabler of transactions and rotator of money helps individuals and firms alike in managing the cash as well as meeting the money needs. It also reduces the worry of customers by acting as a hoarding agency for all the hard earned and legitimate money thereby providing some additional income in the form of interest.
In nutshell, banking reflects the true picture of economy. If economy is not doing well, banking transactions and activity decline as people and firms will be having less money. This is the reason when economies tumble banks are the first in line to take the hit. Converse is also true that banks are the first ones to show positive signs when economy is recovering from economic slump. At the end, we can say that economies run because of banks.