Page 55 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes
The amount to be deposited was equivalent to 3% of the total outstanding amount (loan
and interest) on the last day of the year. If the outstanding amount was higher in the next
year, 3% of the extra amount was to be deposited. In the event of the death of the borrower,
the outstanding loan amount was paid by the insurance fund. The family of the deceased
also received amount equal to the total savings in the borrower’s insurance savings account.
Fixed Deposits: GGS also offered fixed deposit services to its members. Lump sum amounts
deposited for one year were paid interest at 8.75% per annum in the year 2003. For a longer
term, interest was paid at 9.5% for a period greater than one year.

Looking Ahead
The introduction of Grameen II had a positive impact on the membership and portfolio
size of the bank. The number of active clients grew to over four million by 2004 and to 6.2
million by 2006 from 2.3 million in 2002. Due to the introduction of new savings products,
deposits grew from US$ 163 million in 2002 to US$ 450 million by the end of 2005. As of
May 2006, total deposits were at US$ 506.67 million, with members’ deposits at US$ 321.05
million and non-members’ deposits at US$ 185.62 million.

Questions
1. Study and compare the Classic and General Microfinance models of Grameen Bank.
2. Examine the reasons that prompted the bank to introduce a new, more flexible
credit system.
3. Analyze the advantages and disadvantages of Grameen General Microfinance model.
Source: http://www.icmrindia.org/casestudies/

3.6 Summary

The Modern banking System started with the opening of Bank of England in 1964 whereas
Bank of Hindustan was the first bank to be established in India in 1770.
The RBI Act 1934 was passed and the Reserve Bank of India became the first Central bank
of the country w.e.f. 01.04.1935, it took over the Central Banking activities from the Imperial
Bank of India.

Banks can be classified as (a) Central Bank, (b) Public Sector Banks, (c) Private Sector Banks,
and (d) Cooperative Banks.
The main function of the Central Bank is to regulate the monetary mechanism comprising
of the currency, banking and credit systems.

RBI performs its functions with the service motive and not for making profits.
The Reserve Bank acts not only as the banker’s bank but also as the lender of the last resort.

Banks make a profit by borrowing at a lower rate and lending the same funds at a higher
rate of interest.
CRR ensures that a portion of bank deposits is totally risk-free and it enables RBI to
control liquidity in the system.

Lending rates are the ratios fixed by RBI to lend the money to the customers on the basis
of those rates.

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between
the demands they are facing for money.

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