How do banks mediate between those who have surplus money and those who need money?
Banks act as intermediaries between those who have surplus money and those who need money. People who have extra cash deposit their money with banks by opening a bank account. Banks accept these deposits and pay an amount as interest on them. In this way, people's money is safe and earns interest.
Banks use the major portion of the deposits to extend loans to those who are in need of funds for various economic activities. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Explanation
The answer draws directly from the textbook context which explains the loan activities of banks. Banks accept deposits from people with surplus money, keep a small proportion as cash (about 5% in India), and use the major portion to extend loans to borrowers. The interest rate differential is their profit. This is a standard 3-mark question testing students' understanding of the basic banking mechanism.