Loan Activities of the Banks

• Bank act as a mediator between those who have surplus money and who need it.

• Banks keep only a small proportion (15%) of their deposits as cash with themselves

• This is kept for daily transactions (to pay depositors who might come to withdraw their deposited money)

• There is huge demand for loans for various economic activities.

• .Banks use the major portion of the deposits to extend loans.

• The difference between what is charged from borrowers and what is paid to depositors is the main source of the banks.

• The lending rate is always higher than the deposit rates.

Credit (loan)

• An agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

• In rural areas, the main demand for credit is for crop production. Repayment depends on the income from farming

• Usefulness of credit depends upon risk and support in case of loss

Terms of Credit

1. Interest rate

2. Collateral

3. Documentation (e.g. date of birth proof, ration card, photograph, papers of land etc)

4. Mode of repayment