how do banks earn their profits?

A bank gets profit on money deposited by an account holder by extending a portion of deposits as loans. There is a huge demand for loans for various economic activities and infrastructure development. Interests are charged on loans which accrue as profit to banks. The interest offered on deposits is lower than that charged on loans. The difference is the income of the bank. Thus, banks are a mechanism for transfer of money between those who have surplus and those who are in deficit.

The degree of profit of banks varies according to policies laid down by Reserve Bank of India. These policies control the rates of interest and are implemented to regulate the flow of money and inflation in the market.