What is the basic principle of the commercial loan theory of banking?

The commercial loan theory of banking is an approach to banking where banks generate income primarily by issuing loans to borrowers, such as individuals and businesses. Banks lend money at a higher interest rate than the rate they offer for deposits, and this interest rate spread allows the banks to profit from the lending operation. Also, the borrowers are expected to maintaining a certain level of deposits at the bank, thereby providing banks with additional capital to issue more loans.

The basic principle of the commercial loan theory of banking is that banks mainly act as intermediaries between savers who deposit their funds in the banks, and borrowers who seek loans for various purposes. Banks make money by charging higher interest rates on loans compared to the interest rates they pay for deposits. The commercial loan theory states that banks should maintain a balance between lending and deposit taking to ensure their long-term profitability and financial stability. In summary, the basic principle of the commercial loan theory of banking is that banks generate income by acting as intermediaries between savers and borrowers and profiting from the interest rate spread between deposits and loans while maintaining a balance between lending and deposit taking.