Page 53 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes started a small shop. She had plans to send her school-going son to college using the
education loan provided by Grameen Bank. Several women like Saira were able to improve
their living conditions because of Grameen Bank, which provided them small loans. For
over 25 years, Grameen Bank has been following the Grameen model of micro-credit,
later renamed the Grameen Classic System (GCS) to extend loans to the poor in the
country.
Though the system was successful, it was criticized for its standardized rules, which were
strictly enforced. The GCS rules required a strict adherence to repayment schedules. Once
poor borrowers failed to pay their instalments on time, they were not eligible for any
further loans.
In order to address the drawbacks of GCS, Grameen Bank introduced a new credit system
called Grameen General System (GGS) popularly known as Grameen II. Elaborating on
the need for the new system, Muhammad nus (Yunus), Founder and Managing Director of
Grameen Bank said, “The system (GCS) consisted of a set of well-defined standardized
rules. No departure from these rules was allowed.
Once a borrower fell off the track, she found it very difficult to move back on, since the
rules which allowed her to return, were not easy for her to fulfil. More and more borrowers
fell off the track. Then there was the multiplier effect. If one borrower stopped payments,
it encouraged others to follow.” The changes were brought out in the form of new products,
flexible loans and repayment schemes for borrowers who were unable to pay their loans
on time, deposit services, pension services, etc.
The new system was completely demand driven; the products were tailored to the
borrower’s needs. The new flexible system allowed the borrowers to decide on the amount,
term and payment schedule of the loan. GGS brought non-members into its fold by allowing
them to deposit money and use other services.
Background Note
Yunus completed his PhD in Economics from Vanderbilt University in Nashville,
Tennessee. He became the Head of Economics department in Chittagong University in
Bangladesh. In 1971, Bangladesh got its independence. The country was hit by famine in
1974.
During this period, Yunus came face to face with the problems faced by poor women in
Bangladesh when he visited Jorba village, where he saw poor women making bamboo
stools. They were in the clutches of poverty and were forced to sell the products they made
to moneylenders at very low prices. He extended a small loan of US$ 27 to US$ 42 to each
of the women. They repaid the amount to the moneylenders and thus began the journey of
Yunus and Bangladesh Grameen Bank.

When Yunus approached the banks in Bangladesh, asking them to lend loans to the poor,
they were not willing to extend credit as the poor were not considered to be creditworthy
and did not have any collateral to offer.
The Grameen Classic System
Organizing people into groups of five members each and bringing together a few such
groups to form a centre was the keystone of GCS. Under the system, group liability
replaced the collateral that was required by the banks to extend loans. The group had
members from a homogeneous background, who knew each other, but were not related
to each other. Six to ten such groups formed a centre and each village had one or two

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