Explain how banks keep a small amount as reserves and lend out the whole of the rest of the deposits.

Explain how banks keep a small amount as reserves and lend out the whole of the rest of the deposits. 

Ans. When depositors use their deposits via banking instruments like cheques, debit cards and credit cards then banks do not need cash to fulfil these obligations. They only need to make entry in their respective accounts to settle the transaction. But when depositors need cash lakhs of depositors, as per law of large numbers, the figures reaches near average. Therefore, banks easily manage to keep a small amount as reserves and lent out rest of the deposits.