CAIIB – ABM (ADVANCE BANK MANAGEMENT)

CAIIB - Advanced Bank Management - Mod - A : Economic Analysis
FUNDAMENTALS OF ECONOMICS
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1) Economics is “The science which studies human behavior as a relationship between ends and
scarce means which have alternative uses. “
2) The essence of Economics is to acknowledge the reality of scarcity and then figure out how to
organize society in a way which produces the most efficient use of resources.
3) Adam Smith is the Father of Modern Economics.
4) An Enquiry into the Nature and Causes of the Wealth of Nations (published in 1776) is
written by Adam Smith.
5) Economics is the study of how wealth is produced and consumed.
6) Smith’s definition is known as Wealth Definition. It gave more importance to wealth than to
man for whose use wealth is produced.
7) Welfare Definition is coined by Prof. Alfred Marshal. He described Economics as a science
of human welfare.
8) Scarcity Definition is coined by Prof. Lionel Robbins.
9) Prof. Lionel Robbins defines Economics as study of “means” and “Ends”.
a. Man has unlimited wants
b. The means to satisfy human wants are limited
c. Resources are not only limited but have alternative uses
d. Man has to make a choice.
10) Adam Smith is considered to be the Founder of the field Micro Economics.
11) Micro Economics is concerned with the behaviour of individual entities such as markets,
firms, and households.
12) Macro Economics is a branch of Economics that deals with the performance, structure and
behaviour of a national or regional economy as a whole and concerned with the overall
performance of the Economy.
13) Founder of the field of Macro Economics is John Maynard Kenes.
14) John Maynard Kenes wrote the book “General Theory of Employment, Interest and
Money”.
15) An analysis of causes of Business cycles is developed by Mr. Kenes.
16) A market Economy/ Capitalistic Economy is one in which individuals and private firms
make the major decisions about production and consumption. E.g.: United Kingdom.
17) A Command Economy/Socialistic Economy is one in which the government makes all
important decisions about production and distribution.
18) Mixed Economy is where public sector, private sector and joint sector coexist and
complement each other. E.g.: India
19) Laissez – faire Economy is the extreme case of a Market Economy.
Unit – 2 : SUPPLY & DEMAND
1) Theory of Supply and Demand shows how consumer preferences determine consumer
demand for commodities, while business costs determine the supply of commodities.
2) The relationship that exists between price and quantity bought is called as the Demand
Schedule or the Demand Curve. The quantity demanded increases with the fall in price.
3) Quantity and Price are inversely related.
4) The graphical representation of the demand schedule is called as the Demand Curve.
5) Law of Downward – sloping demand: When the Price of a commodity is raised (and other
things being constant), buyers tend to buy less of the commodity. Similarly, when the price is
lowered, other things being constant, quantity demanded increases.
6) Market Demand curve obey the Law of Downward- Slopping demand
7) A Down ward slopping Demand Curve relates Quantity Demanded to Price
8) Factors influences the Demand Curve
- Average levels of income - The size of market/population
- The prices and availability of related goods - Tastes or Preferences - Special Influences
9) The Supply Schedule relates the quantity supplied of a good to its market price, other things
being constant.
10) Shifts in Supply Means when changes in factors other than goods own price affect the
quantity supplied.
11) The Supply Schedule (or Supply Curve) for a commodity shows the relationship between its
market price and the amount of that commodity those producers is willing to produce and
sell, other things being constant.
12) Forces behind the supply Curve:
- Cost of Production - Prices of inputs and technological advances - Government
Policy
- Prices of related goods - Special Factors like weather influence on farming and agroindustry
13) Supply increases (or Decreases) when the amount supplied increases (or Decreases) at each
market price.
14) Supply and demand interacts to produce equilibrium price and quantity or market
equilibrium.
15) The Market Equilibrium comes at that price and quantity where the forces of supply and
demand are in balance.
16) At the Equilibrium price, the amount that buyers want to buy is just equal to the amount
that sellers want to sell.
17) A Market equilibrium comes at the price at which quantity demanded equals quantity
supplied.
18) The Equilibrium Price is also called as the Market Clearing Price.
Unit – 3 : MONEY SUPPLY & INFLATION
1) Money is anything which performs the following four functions:
- Medium of Exchange - A measure of value
- A store of value over time - Standard for deferred payments
2) Medium of Exchange: Individual goods and services and other physical assets, are “priced”
in terms of money and are exchanged using money.
3) A Measure of Value: Money is used to measure and record the value of goods or services.
4) A Store of value over time: Money can be held over a period of time and used to finance
future payments.
5) Standard for Deferred Payments: Money is used as an agreed measure of future receipts
and payments in contracts.
6) Money supply refers to the stock of money in circulation in the economy at a given point of
time. This is partly exogenous (Decided by the Govt and the RBI) and partly endogenous.
7) There are four common measures of Money supply, commonly used in India:
- Narrow Money (M1)= Currency with Public Demand Deposits with Banking System +
‘Other” Deposits with the RBI
- M2 = M1+ Savings deposits of Post Office Savings Banks
- M3 = M1+ Time Deposits with the Banking System
- M4 = M3+ All Deposits with post office savings banks ( Excluding NSCs)
8) Currency with Public = Currency in circulation - Cash held by banks.

9) Demand Deposits = All liabilities which are payable on demand and they include current
Deposits, demand liabilities portion of saving Banks Deposits, margins held Against LC/BG,
Balance in OD FDs, Cash Certificates and Cumulative/RDs etc.
10) “Time Deposits”= which are payable otherwise than on demand and they include fixed
Deposits, Cash Certificates, Cumulative and recurring Deposits, time Liabilities portion of
savings bank deposits, etc.
11) The concept of Inflation refers to a sustained rise in the general level of prices of goods and
services in an economy over a period of time.
12) Inflation leads to fall in purchasing power.
13) Causes of Inflation:
- Demand-pull inflation - Cost – Push Inflation
14) Demand – pull Inflation is a rise in general prices caused by increasing aggregate demand for
goods and services.
15) Cost- Push Inflation is a type of inflation caused by substantial increases in the cost of
production of important goods of services, where no suitable alternative is available.
16) Measure of Inflation: - Calculating inflation with Price Indexes
17) Inflation = (Price Index in Current Year–Price index in Base Year) X 100/Price index in
Base Year
18) There are 4 Important Price Indexes
- Wholesale Price Index (WPI) - Food Inflation Index (FII)
- Consumer Price Index (CPI) - GDP Deflator
19) Wholesale Price Index: The WPI reflects the change in the level of prices of a basket of
goods at the wholesale level. WPI focuses on the price of goods traded between corporations at
the wholesale stage, rather than goods bought by consumers.
20) In India WPI (Headline Inflation) is the official inflation index used for policy decisions.
21) WPI announced in Monthly frequency.
22) The different components along with their weightage in Wholesale Price Index (WPI).
Primary Articles
Food Articles 15.4025
Non Food Articles 6.1381
Minerals 0.4847
Sub Total 22.0253
Fuel, Power, Light & Lubricants
Coal Mining 1.7529
Mineral Oils 6.9896
Electricity 5.4837
Sub Total 14.2262
Manufactured Products
Food Products 11.5378
Beverages, Tobacco and Tobacco Products 1.3391
Textiles 9.7999
Wood and Wood Products 0.1731
Paper and Paper Products 2.0440
Leather and Leather Products 1.0193
Rubber and Plastic Products 2.3882
Chemicals and Chemical Products 11.9312
Non-Metallic Mineral Products 2.5159
Machinery and Machine Tools 8.3633
Transport Equipment and Parts 4.2948
Basic Metals and Alloys 8.3419
Sub Total 63.7485
Grand Total 100.00
23) The Base year for WPI is 1993-94.
24) From August 2010 onwards, Base Year for WPI is changed to 2004-05. And the weightage
are as follows: (Source: Business Line 15-09-10)
25) The Indices for the Food Group and fuel group will be announced on weekly basis.
26) Consumer Price Index (CPI): The CPI reflects the change in the level of prices of a basket
of Goods and services purchased/consumed by the households.
27) CPI is the cost of living index popularly known as Core Inflation.
28) There are four measures of CPI,
- The CPI for Industrial Workers (IW) has a broader coverage than the others
- The CPIs for Agricultural Labourers (AL),
- Rural Labourers (RL) - And Urban Non-Manual Employees (UNME).
29) In the organized sector, CPI-IW is used as a cost of living index.
30) Among the four measures of CPI, the CPI for Industrial Workers (IW) has a broader
coverage than the others.
31) Why do the WPI and the CPIs differ?
They differ in terms of their weighting pattern. First, food has a larger weight in CPIs -
ranging from 46 per cent in CPI-IW to 69 per cent in CPI-AL, whereas it has a weight of
only 27 per cent in the WPI. The CPIs are, therefore, more sensitive to changes in prices of
food items.
32) CPI in India is released by Labour Bureau, Ministry of Labour and Employment,
Government of India.
33) Since 1943 the Central Government took upon itself the job of compilation and
maintenance of Consumer Price Index Numbers in pursuance of the recommendations of the
Rau Court of Enquiry.
34) The Consumer Price Index Numbers for Industrial Workers (CPI-IW) for 50 centers and All-
India weighted index on base 1960=100 was started on the basis of the Weighting Diagram
drawn by conducting the Family Living Survey (FLS) in 1958-59.
35) The current series (1982=100) replaced the old (1960=100) series with effect from
October, 88.
36) GDP Deflator: it is measure of the level of prices of all new, domestically produced, final
Goods and services in an economy.
37) GDP deflator is not based in a fixed basket of Goods and services
Unit – 4 : Theories of Interest
1) Interest is a payment made by a borrower for the use of a sum of money for a period of time.
2) Three elements can be distinguished in interest:
- Payment for the risk involved in making the loan
- Payment for the trouble involved
- Pure interest, i.e. a payment for the use of money.
3) J M Keynes in his book “The General Theory of Employment, Interest and Money” views
that the rate of interest is purely monetary phenomenon and is determined by Demand for
money and supply of money.
4) J M Keynes theory is known as “Liquidity Preference Theory”
5) Rate of interest and bond prices are inversely related.
6) Money Demand curve follows from above that quantity of money demanded increases with
the fall in the rate of interest or with the increase in level of nominal income.
7) The rate of interest is determined by demand for money (Liquidity Preference) and supply
of money – JM Kenes.
8) The position of money demand curve depends upon two factors: 1) The level of nominal
income and 2) the expectation about the changes in bond prices in the future which implies
change in rate of interest in future.
9) IS and LM curves Theory promulgated by Sir Hon Richard Hicks and Alvin Hansen.
10) The IS curve and the LM curve relate the two variables a) Income and b) the rate of
interest. The intersection point of the two curves is the equilibrium rate of interest.
11) LM= Liquidity preference and Money supply equilibrium. LM curve is derived from
Kenes Liquidity preference theory of interest.
12) IS = Classical Theory
Unit – 5 : Business Cycles
1) The term Business cycle refers to economy-wide fluctuations in production or economic
activity over several months or years.
2) Business Cycle is also known as Economic Cycle.
3) Business Cycle simply means the whole course of business activity which passes through
the phases of prosperity and depression.
4) A business Cycle is not a regular, predictable, or repetitive phenomenon like the swing of
the pendulum of a clock. Its timing is random and, to a large degree, unpredictable.
5) Characteristics of a Business Cycle:
i. A business cycle is synchronic ii. A business cycle show a wave like movement
iii. Cyclical fluctuations are recurring in nature
iv. There can be no indefinite depression or eternal boom period
v. Business cycles are pervasive in their effects. vi. The up and down movements are not
symmetrical
6) Phases of Business Cycle:
Boom Recession Depression Recovery
7) Boom:
- During the Boom phase production capacity is fully utilized and also products fetch an above
normal price which gives higher profit.
- In Boom period, consumption will be decreased as prices are going up.
- The Demand is more or less stagnant or it even decreases.
8) Recession:
- A downward tendency in demand is observed. The supply exceeds demand
- Desire for liquidity increases all around.
- Producers are compelled to reduce price so that they can find money to meet their obligations.
- This Phase of the business cycle is known as the Crisis.
9) Depression:
- Underemployment of both men and materials is a characteristic of this phase. General Demand
falls faster than production
- Volume of Production will be reduced.
- The demand for the bank credit is at its lowest which results in idle funds.
- The interest rates are decline regime.
10) Recovery:
- Depression phase done not continue indefinitely.
- Wages will be paid low.
- Prices are at the lowest, the consumers, who postponed their consumption expecting a still
further fall in price, now start consuming.
- As demand increases, the stocks of goods become insufficient.
Unit – 6 : Indian Economy and Various Sectors of the Economy (Update latest data)
1) The average growth rate of the Indian Economy over a period of 25 Years since 1980-81 was
about 6.00%.
2) During 2000-01 to 2007-08, the growth rate is 7.20% when compared with 2003-04 to 2007-
08.
3) Various sectors of Indian economy:
i. Agriculture ii. Industry
iii. Micro and Small Enterprises (MSEs) iv. Services
4) The average growth rate of the Indian Economy over a period of 25 Years since 1980-81 was
about 6.00%.
5) Agriculture Sector is one of the most important sectors of Indian economy.
6) Agriculture Sector accounted for 17% of GDP in 2008-09.
7) Industry Sector accounts for 19% of GDP in 2008-09. About 1/3rd of the industrial labour
force is engaged in simple household manufacturing only.
8) Central Statistical Organisation (CSO) classifies the industrial sector into 3 segments
i. Mining and Quarrying ii. Manufacturing and Electricity iii. Gas and Water
Supply.
9) The Sector of MSME is accounted for around 39 % of total industrial production, 34% of
the exports in the industrial sector and around 35% if total Employment among units engaged in
manufacturing and services.
10) The MSMED Act, 2006 classifies enterprises broadly into two categories
i. Manufacturing enterprises ii) Service Enterprises.
11) These broad categories are further classified into Micro Enterprises, Small Enterprises
and medium enterprises, depending up on the level of investment in plant and machinery
and equipment as the case may be.
12) The Service Sector accounts for about 2/3rd of India’s GDP i.e. 64% in 2008-09.
13) Service Sector is also called as Tertiary Sector.
Unit – 7 : Economic Reforms
1) The economic Reforms started in 1991.
2) Real Sector Policy measures mainly focused on the manufacturing sector in the early
stages of reform process.
3) MRTP Act Monopolies and Restrictive Trade Practices Act, 1969
4) APMC Act (Agricultural Produce Market Committee Act )
5) The primary objective of The APMC Act in each state of India requires all agricultural
products to be sold only in government - regulated markets. This was amended and permitting
the farmers to bypass the mandatory requirement of regulated market.
6) Essential Commodities Act, 1955
7) Financial Sector reforms have been arrived out in accordance with the recommendations made
by basically three committees:
i. Narasimham Committee report on financial sector Reforms (1992)
ii. Narasimham Committee report on Banking sector Reforms (1998)
iii. S H Khan Report (1998) of the working group for harmonize the role and operations of
Development Financial Institutions and Banks reforms in financial Sector
8) IRS- Interest Rate Swaps
9) FRA - Forward Rate Agreements
10) Collateralized Borrowings and Lending Obligation – CBLO
11) CDs (Certificate of Deposits) are short-term borrowings in the form of Usance Promissory
Notes having a maturity of not less than 15 days up to a maximum of one year.
12) Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note.
13) Who can issue Commercial Paper (CP)?
a. Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-
India financial institutions (FIs)
14) Futures and options represent two of the most common form of "Derivatives".
15) Derivatives are financial instruments that derive their value from an 'underlying'. The
underlying can be a stock issued by a company, a currency, Gold etc.
16) The derivative instrument can be traded independently of the underlying asset.
17) The value of the derivative instrument changes according to the changes in the value of
the underlying.
18) Derivatives are of two types –
i. Exchange traded and
ii. Over the counter.
19) Exchange traded derivatives, as the name signifies are traded through organized exchanges
around the world. These instruments can be bought and sold through these exchanges, just like
the stock market.
20) Some of the common exchange traded derivative instruments are futures and options.
21) Over the counter (popularly known as OTC) derivatives are not traded through the
exchanges. They are not standardized and have varied features.
22) Some of the popular OTC instruments are forwards, swaps, swaptions etc.
23) Futures
24) A 'Future' is a contract to buy or sell the underlying asset for a specific price at a
predetermined time. If you buy a futures contract, it means that you promise to pay the price of
the asset at a specified time. If you sell a future, you effectively make a promise to transfer the
asset to the buyer of the future at a specified price at a particular time. Every futures contract has
the following features:
- Buyer - Seller - Price - Expiry
25) Some of the most popular assets on which futures contracts are available are equity stocks,
indices, commodities and currency.
26) The difference between the price of the underlying asset in the spot market and the futures
market is called 'Basis'. (As 'spot market' is a market for immediate delivery)
27) Options
Options contracts are instruments that give the holder of the instrument the right to buy or sell
the underlying asset at a predetermined price.
28) An option can be a 'call' option or a 'put' option.
29) A call option gives the buyer, the right to buy the asset at a given price. This 'given price'
is called 'strike price'. It should be noted that while the holder of the call option has a right to
demand sale of asset from the seller, the seller has only the obligation and not the right. For
e.g.: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.
30) A 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer.
Here the buyer has the right to sell and the seller has the obligation to buy.
31) The Payment and Settlement Systems Act, 2007 empowering the RBI to regulate and
supervise payments and settlement system.
32) Cheque Truncation System(CTS)has been introduced in cheque clearing July 08 in New
Delhi.
33) G Sec is market auction related instruments and they are paid by Ways and Means
Advances, automatic monetization.
34) Foreign investment is of two kinds – (i) Foreign Direct Investment (FDI) and (ii) Foreign
Portfolio Investment.
35) ‘FDI’ means investment by non-resident entity/person resident outside India in the
capital of the Indian company under Schedule 1 of FEM (Transfer or Issue of Security by a
Person Resident outside India) Regulations 2000.
36) Portfolio investment in both primary and secondary market by FII was opened up in
1992
37) ECB:
i. Source of funds for corporate from abroad with advantage of
ii. lower rates of interest prevailing in the international financial markets
iii. longer maturity period
iv. for financing expansion of existing capacity as well as for fresh investment
38) ECB is Defined as to include commercial loans [in the form of bank loans, buyers’ credit,
suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, CP)]
availed from non-resident lenders with minimum average maturity of 3 years
39) Poverty is measured by Gini Coefficient, a standard measure of Income/Expenditure in
equality
40) The Gini coefficient, invented by the Italian statistician Corado Gini, is a number between
zero and one that measures the degree of inequality in the distribution of income in a given
society. The coefficient would register zero (0.0 = minimum inequality) for a society in which
each member received exactly the same income and it would register a coefficient of one (1.0=
maximum inequality) if one member got all the income and the rest got nothing
41) Human Development Index (HDI) a widely used indicator of Socio- Economic Conditions
has place India at 132 out of 189 countries in the world in the year 2006.
42) The Human Development Index (HDI) is a comparative measure of life expectancy,
literacy, education and standards of living for countries worldwide. It is a standard means of
measuring well-being, especially child welfare. It is used to distinguish whether the country is a
developed, a developing or an under-developed country, and also to measure the impact of
economic policies on quality of life. The index was developed in 1990 by Pakistani economist
Mahbub ul Haq and Indian economist Amartya Sen.
Unit – 8 : Monetary Policy and Fiscal Policy
1) Monetary Policy is the process by which the Government, Central Bank controls
i. The money supply ii. Availability of money and iii. Cost of money or rate of interest
In order to attain a set of objective oriented towards the growth and stability of the economy.
2) Monetary policy is referred to as either being expansionary policy or a contractionary
policy.
3) An expansionary policy increases the total supply of money in the economy. This is used to
combat unemployment in a recession by lowering interest rates.
4) A contractionary policy decreases the total money supply. This is used to combat inflation
by raising the interest rates.
5) Tools of Monetary policy:
i. Bank Rate ii. Cash Reserve Ratio iii. Statutory Liquidity Ratio
iv. Market Stabilization Scheme v. Repo Rate vi. Reverse Repo Rate
vii. Open Market Operations
6) Bank Rate: It is also referred as Discount rate, is the rate of interest which a central bank
charges on the loans and advances that it extends to commercial banks and other financial
intermediaries.
7) Changes in the Bank Rate are often used by Central bank to control the money supply.
8) The structure of interest rates is administered by RBI.
9) Cash Reserve Ratio (CRR): The present banking system is called a “Fractional Reserve
Banking System, as the banks are required to keep only a fraction of their deposit liabilities in
the form of liquid cash with the central bank for ensuring Safety and liquidity of deposits.
10) CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank
deposits.
11) Statutory Liquidity Ration (SLR): SLR refers to the amount that all banks requires
maintaining in cash or in the form of Gold or approved securities.
12) Approved securities mean dated securities, government bonds, and share of different
companies.
13) The SLR is determined as % of Total Demand and Time Liabilities
14) Demand Liabilities
Demand Liabilities' include all liabilities which are payable on demand and they include current
deposits, demand liabilities portion of savings bank deposits, margins held against letters of
credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring
deposits, outstanding Telegraphic Transfers (TTs), Mail Transfer (MTs), Demand Drafts (DDs),
unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for
advances which are payable on demand. Money at Call and Short Notice from outside the
Banking System should be shown against liability to others.
15) Time Liabilities.
Time Liabilities are those which are payable otherwise than on demand and they include fixed
deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings
bank deposits, staff security deposits, margin held against letters of credit if not payable on
demand, deposits held as securities for advances which are not payable on demand and Gold
Deposits.
16) Market Stabilization Scheme:
RBI introduced Market Stabilization Scheme after consulting GOI for mopping up liquidity of a
more enduring nature. Under this scheme, the GOI issue existing instrument, such as Treasury
Bills/ and or dated securities by way of auctions under the MSS, in addition to the normal
borrowing requirements, for absorbing liquidity form the system.
17) Repo Rate :
Repo (Repurchase) rate is the rate at which RBI lends short-term money to the banks. Bank
lending rates are determined by the movement of Repo Rate.
18) Reverse Repo Rate :
Reverse Repo Rate is the rate at which banks park their short term excess liquidity with the RBI.
The RBI uses this tool when it feels there is too much money floating in the Banking System.
19) An Increase in Reverse Repo means that the RBI will borrow money from the Banks at
a higher rate of interest, so banks would prefer to keep their money with the RBI.
20) Open Market Operations :
Under this, RBI buys or sells government bonds in the secondary market.
21) By absorbing bonds, it drives up bond yields and injects money into the market. When it
sells the bonds, it done so to such the money out of the system.
22) RBI’s monetary policy ‘s objectives:
- Monitor the global and domestic economic conditions and respond swiftly as required.
- Ensure higher bank credit expansion to achieve higher growth but at the same time protect the
credit quality
- Maintain price stability and financial stability
- Give thrust on Interest Rate Management, Inflation Management and Liquidity Management.
23) Fiscal Policy :
Fiscal Policy is the use of government spending and revenue collection the economy.
Fiscal Policy refers to the overall effect of the budget outcome on economic activity.
24) FRMB Act : Fiscal Responsibility and Budget Management Act – 2003
25) Dr E A S Sharma Committee January, 2000 recommended draft legislation on fiscal
responsibility.
26) FRBM requirements are
- The Government to place before Parliament 3 statement each year along with Budgets,
Covering Medium Term Fiscal Policy, Fiscal Policy Strategy and Macroeconomic Framework
- Center to reduce the fiscal deficit (Generally 3% of GDP) and more categorically to “Eliminate
revenue deficit’ by 31-03-2008. Government to set a ceiling on guarantee (0.5% o GDP)
- Act prohibits the Center form borrowing from the RBI, i.e. it bans ‘Deficit financing’ through
money creation. The RBI is also barred from subscribing to primary issues of Central
Government Securities.
- The Finance Minister is required to keep Parliament informed through quarterly review on the
implementation, and to take corrective measure.
- The main theme of the FRBM Act is to reduce the dependence of the Government on
borrowings and help to reduce the fiscal deficit in a phased manner.
Unit – 9 : GDP Concepts
1) Gross Domestic Product (GDP): It is the total market value of all the final goods and
services produced within the territorial boundary of a country, using domestic resources, during a
given period of time, usually 1 year.
2) Gross national Income at Market Price = GDP at Market Price + Taxes less subsidies on
production and imports (net receivable from abroad + Compensation of Employees (Net
Receivables from abroad) + Property income (Net receivables from abroad)
3) Gross National Product (GNP) = GDP + Total Capital gains from overseas investment (-)
income earned by foreign nationals domestically
4) According to the National Income Accounting, there are three ways to complete GDP:
i. Expenditure wise ii. Income wise iii. Product wise
5) Expenditure Method : GDP= Consumption + Gross Investment + Government
Spending + (Exports- Imports) GDP = C+I+G+(X-M)
a. Consumption : This included personal expenditures pertaining to food, households, medical
expenses, rent, etc
b. Gross Investment : Business Investment as capital which includes construction of a new mine,
purchase of machinery and equipments for a factory, purchase of software, expenditure on new
houses, buying goods and services but investments on financial products is not included as it
falls under savings.
c. Government spending: It is the sum of government expenditures on final goods and services.
d. Exports: This includes all goods and services produced for overseas consumptions.
e. Imports: This includes any goods or services imported for consumption and it should be
deducted to prevent from calculating foreign supply as domestic supply.
6) Income Approach : GDP from the income is the sum of the following major components:
i. Compensation of employees ii. Property income iii. Production taxes and
depreciation on capital
7) Compensation of Employees: It represents wages, salaries and other employee supplements
8) Property Income: It constitutes corporate profits, proprietor’s income, interests and rents
9) GDP at market price measures the value of output at market prices after adjusting for the
effect of indirect taxes and subsidies on the prices.
10) Market price is the economic price for which a good or service is offered in the market
place.
11) GDP at factor cost measures the value of output in terms of the price of factors used in its
production.
12) GDP at factor cost = GDP at Market Price – (Indirect taxes – Subsidies)
13) Product Approach
In India we have getting GDP product wise belongs to 8 sectors.
14) Real GDP or GDP at constant price: It means the value of today’s output at yesterday
price. Real GDP is calculated by tracking the volume or quantity of production after removing
the influence of changing prices or inflation.
15) Normal GDP or GDP at Current prices: It represents the total money value of final goods
and services produced in a given year, where the values are expressed in terms of the market
prices of each year.
16) Factors of production are : Land, Labour, Capital and Entrepreneur
Unit – 10 : Union Budget
1) Net Tax Revenue = Gross Tax Revenue (-) NCCD transferred to the National Calamity
Contingency fund (-) States’ share
2) Total Revenue Receipts = Net Tax Revenue + Total Non- Tax revenue
3) Capital Receipts = Non- debt receipts + Debt Receipts
4) Total Receipts = Total Revenue Receipts + Capital Receipts+ Drawdown of Cash Balance
5) Financing of Fiscal Deficit : Debt Receipts + Draw-down of cash balance
6) Non- Plan Expenditure = Revenue Non- Plan Expenditure + Capital Non-plan Expenditure
7) Plan Expenditure = Revenue Expenditure + Capital Expenditure
8) Total Expenditure = Total Non-plan Expenditure + Total Plan Expenditure
9) Revenue Deficit = Revenue expenditure (-) Revenue receipts
10) Gross Fiscal Deficit is the excess of total expenditure including loans, net of recoveries over
revenue receipts (including external grants) and non- debt receipts
11) Net Fiscal deficit = The gross fiscal deficit (-) interest payments
12) Net Primary deficit = Net fiscal deficit (– ) net interest payments
13) NCCD: National Council on Crime and Delinquency.
Unit – 11 : Challenges Facing Indian Economy
Unique features of Indian Economy:
a. India’s growth is driven by domestic demand – both consumption and investment.
b. Twin Deficit – Fiscal & Current Account
c. Supply constrained economy
CAIIB - Advanced Bank Management - Mod - B : Business Mathematics
Unit – 12 : Time Value of Money
Present Value
Present value describes how much a future sum of money is worth today. Three most influential
components of present value are : time, expected rate of return, and the size of the future cash
flow. The concept of present value is one of the most fundamental and pervasive in the world of
finance. It is the basis for stock pricing, bond pricing, financial modeling, banking, insurance,
pension fund valuation. It accounts for the fact that money we receive today can be invested
today to earn a return. In other words, present value accounts for the time value of money.
The formula for present value is:
PV = CF/(1+r)n
Where:
CF = cash flow in future period
r = the periodic rate of return or interest (also called the discount rate or the required rate of
return)
n = number of periods
Example :
Assume that you would like to put money in an account today to make sure your child has
enough money in 10 years to buy a car. If you would like to give your child 10,00,000 in 10
years, and you know you can get 5% interest per year from a savings account during that time,
how much should you put in the account now?
PV = 10,00,000/ (1 + .05)10 = 6,13,913/-
Thus, 6,13,913 will be worth 10,00,000 in 10 years if you can earn 5% each year. In other words,
the present value of 10,00,000 in this scenario is 6,13,913.
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Future Value
The value of an asset or cash at a specified date in the future that is equivalent in value to a
specified sum today. It refers to a method of calculating how much the present value (PV) of
an asset or cash will be worth at a specific time in the future. There are two ways to calculate
FV:
1) For an asset with simple annual interest: = Original Investment x (1+(interest rate*number of
years))
2) For an asset with interest compounded annually: = Original Investment x ((1+interest
rate)^number of years)
Example:
1) 10,000 invested for 5 years with simple annual interest of 10% would have a future value of
FV = 10000(1+(0.10*5))
= 10000(1+0.50)
= 10000*1.5
= 15000
2) 10,000 invested for 5 years at 10%, compounded annually has a future value of :
FV = 10000(1+0.10)^5)
= 10000(1.10)^5
= 10000*1.61051
= 16105.10
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Annuities
Annuities are essentially a series of fixed payments required from you or paid to you at a
specified frequency over the course of a fixed time period. The most common payment
frequencies are yearly, semi-annually (twice a year), quarterly and monthly. There are two basic
types of annuities: ordinary annuities and annuities due.
Ordinary Annuity: Payments are required at the end of each period. For example, straight
bonds usually pay coupon payments at the end of every six months until the bond's maturity date.
Annuity Due: Payments are required at the beginning of each period. Rent is an example of
annuity due. You are usually required to pay rent when you first move in at the beginning of the
month, and then on the first of each month thereafter.
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Present Value of an AnnuitY
The present value an annuity is the sum of the periodic payments each discounted at the given
rate of interest to reflect the time value of money.
PV of an Ordinary Annuity = R (1 − (1 + i)^-n)/i
PV of an Annuity Due = R (1 − (1 + i)^-n)/i × (1 + i)
Where,
i is the interest rate per compounding period;
n are the number of compounding periods; and
R is the fixed periodic payment.
Example :
1. Calculate the present value on Jan 1, 2015 of an annuity of 5,000 paid at the end of each
month of the calendar year 2015. The annual interest rate is 12%.
Solution
We have,
Periodic Payment R = 5,000
Number of Periods n = 12
Interest Rate i = 12%/12 = 1%
Present Value
PV = 5000 × (1-(1+1%)^(-12))/1%
= 5000 × (1-1.01^-12)/1%
= 5000 × (1-0.88745)/1%
= 5000 × 0.11255/1%
= 5000 × 11.255
= 56,275.40
2. A certain amount was invested on Jan 1, 2015 such that it generated a periodic payment of
10,000 at the beginning of each month of the calendar year 2015. The interest rate on the
investment was 13.2%. Calculate the original investment and the interest earned.
Solution
Periodic Payment R = 10,000
Number of Periods n = 12
Interest Rate i = 13.2%/12 = 1.1%
Original Investment = PV of annuity due on Jan 1, 2015
= 10,000 × (1-(1+1.1%)^(-12))/1.1% × (1+1.1%)
= 10,000 × (1-1.011^-12)/0.011 × 1.011
= 10,000 × (1-0.876973)/0.011 × 1.011
= 10,000 × 0.123027/0.011 × 1.011
= 10,000 × 11.184289 × 1.011
= 1,13,073.20
Interest Earned = 10,000 × 12 − 1,13,073.20
= 1,20,000 – 1,13,073.20
= 6926.80
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Net Present Value
Net present value is the difference between the present value of cash inflows and the present
value of cash outflows that occur as a result of undertaking an investment project. It may be
positive, zero or negative. These three possibilities of net present value are briefly explained
below:
Positive NPV:
If present value of cash inflows is greater than the present value of the cash outflows, the net
present value is said to be positive and the investment proposal is considered to be acceptable.
Zero NPV:
If present value of cash inflow is equal to present value of cash outflow, the net present value is
said to be zero and the investment proposal is considered to be acceptable.
Negative NPV:
If present value of cash inflow is less than present value of cash outflow, the net present value is
said to be negative and the investment proposal is rejected.
Net present value method (also known as discounted cash flow method) is a popular capital
budgeting technique that takes into account the time value of money. It uses net present value of
the investment project as the base to accept or reject a proposed investment in projects like
purchase of new equipment, purchase of inventory, expansion or addition of existing plant assets
and the installation of new plants etc.
To be at Net Present Value you also need to subtract money that went out (the money you
invested or spent):
Add the Present Values you receive
Subtract the Present Values you pay
1. Company A is considering a new piece of equipment. It will cost Rs. 6,000 and will produce a
cash flow of Rs. 1,000 every year for the next 12 years (the first cash flow will be exactly one
year from today).
(a) What is the NPV if the appropriate discount rate is 10%?
You can either discount each individual cash flow or recognise that the Rs. 1,000 cash flows are
just a twelve year annuity. So,
PV = a/i[l -1/(1 +i)n]
PV= 1,000/0.1 [1 - 1/(1.1)12]
PV = Rs. 6,814
Adding this to the original investment gives an NPV of
NPV = Rs. 6,814 - Rs. 6,000
NPV =Rs. 814
……………………………………………………………………………………
(b) What is the NPV if the appropriate discount rate is 12%?
PV= 1,000/0.12 [1 -1/(1.12)12]
PV = Rs. 6,194
Adding this to the original investment gives an NPV of
NPV = Rs. 6,194-Rs. 6,000
NPV=Rs. 194
(c) What is the NPV if the appropriate discount rate is 15%?
PV= 1,000/0.15 [1-1/(1.15)12]
PV = Rs. 5,421
Adding this to the original investment gives an NPV of
NPV = Rs. 5,421-Rs. 6,000
Unit -13 : Sampling Methods
Sampling
A process used in statistical analysis in which a predetermined number of observations will be
taken from a larger population. When taking a sample from a larger population, it is important to
consider how the sample will be drawn. To get a representative sample, the sample must be
drawn randomly and encompass the entire population.
For example, a lottery system could be used to determine the average age of students in a
University by sampling 10% of the student body, taking an equal number of students from each
faculty.
There are three types of sampling:
1. Probability sampling: it is the one in which each sample has the same probability of being
chosen.
2. Purposive sampling: it is the one in which the person who is selecting the sample is who tries
to make the sample representative, depending on his opinion or purpose, thus being the
representation subjective.
3. No-rule sampling: we take a sample without any rule, being the sample representative if the
population is homogeneous and we have no selection bias.
We will always make probability sampling, because in case we choose the appropriate technique,
it assures us that the sample is representative and we can estimate the errors for the sampling.
There are different types of probability sampling:
• Random sampling with and without replacement.
• Systematic sampling.
• Stratified sampling.
• Cluster sampling.
• Other types of sampling techniques
Random sampling with and without replacement
When a certain element is selected and we have measured the variables needed in a certain study
and it can be selected again, we say that we make sampling with replacement. This sampling
technique is usually called simple random sampling.
In the case that the element cannot be selected again after being selected once, we say that we
have obtained the sample through a random sampling without replacement.
Systematic Sampling
In systematic sampling, elements are selected from the population at a uniform level that is
measured in time, order, or space. If we wanted to interview every twentieth student on a college
campus, we would choose a random starting point in the first twenty names in the student
directory and then pick every twentieth name thereafter.
Stratified Sampling
To use stratified sampling, we divide the population into relatively homogenous groups, called
strata. Then we use one of two approaches. Either we select at random from each stratum a
specified number of elements corresponding to the proportion of that stratum in the population as
a whole or we draw an equal number of elements from each stratum and give weight to the
results according to the stratum's proportion of total population.
Cluster Sampling
In cluster sampling, we divide the population into groups or clusters and then select a random
sample of these clusters. We assume that these individual clusters are representative of the
population as a whole. If a market Research team is attempting to determine by sampling the
average number of television sets per household in a large city, they could use a city map and
divide the territory into blocks and then choose a certain number of blocks (clusters) for
interviewing. Every household in each of these blocks would be interviewed. A well designed
cluster sampling procedure can produce a more precise sample at considerably less cost than that
of simple random sampling.
Sampling distribution
Sampling distribution is the distribution of all possible values of a statistic from all possible
samples of a particular size drawn from the population.
Standard Error
Standard deviation of the distribution of the sample means is called the standard error of the
mean.
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Numerical on Sampling
A jar contains 3 red marbles, 7 green marbles and 10 white marbles. If a marble is drawn at
random, what is the probability that marble drawn is white?
a. 2/5
b. 1/2
c. 3/8
d. 10/13
Ans – b
Solution :
Here Red = 3
Green = 7
White = 10
Hence total sample space is (3+7+10)= 20
Out of 20 one ball is drawn n(S) = {c(20,a.} = 20
To find the probability of occurrence of one White marble out of 10 white ball
n(R)={c(10,a.} = 10
Hence P(R) = n(R)/n(S)
= 10/20 = 1/2
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A sack contains 4 black balls 5 red balls. What is probability to draw 1 black ball and 2 red balls
in one draw?
a. 12/21
b. 9/20
c. 10/21
d. 11/20
Ans – c
Solution :
Out of 9, 3 (1 black & 2 red) are expected to be drawn)
Hence sample space
n(S) = 9c3
= 9!/(6!×3!)
= 362880/4320
= 84
Now out of 4 black ball 1 is expected to be drawn hence
n(B) = 4c1
= 4
Same way out of 5 red balls 2 are expected be drawn hence
n(R) = 5c2
= 5!/(3!×2!)
= 120/12
= 10
Then P(B U R) = n(B)×n(R)/n(S)
i.e 4×10/84 = 10/21
Unit - 14 : Correlation and Regression
Correlation - Regression :
1. Regression and correlation analyses show us how to determine both the nature and
strength of the relationship between the two variables. Through this method we will
learn to predict, with some accuracy, the value of the unknown variable based on past
observation and other factors.
2. Correlation analysis is the statistical tool to describe the degree to which one variable is
linearly related to other.
Correlation is a relationship or dependency that exists between two variables.
If a correlation exists, it is said that the variables are correlated or there is a correlation between
them.
The linear correlation coefficient is the ratio between the covariance and the product of
standard deviations of both variables.
The linear correlation coefficient is denoted by the letter r.
The regression line is the line that best fits or represents the data on the scatter plot.
Line of Regression of Y on X
The regression line of y on x is used to estimate the values of y from x.
The slope of the line is the quotient between the covariance and variance of the variable X.
Unit - 15 : Time Series
Time Series:
4 Types of variation in Time series:
1. Secular Trend – Over a long period of time - Consumer price Index
2. Cyclical Fluctuation – Business cycle
3. Seasonal variation – Doctor – Seasons (changes within a year)
4. Irregular variation – Unpredictable, Earth Quake, war etc.
Unit - 16 : Estimation
Estimation refers to the process by which one makes inferences about a population, based on
information obtained from a sample.
Point Estimate vs. Interval Estimate
Statisticians use sample statistics to estimate population parameters. For example, sample means
are used to estimate population means; sample proportions, to estimate population proportions.
An estimate of a population parameter may be expressed in two ways:
 Point estimate. A point estimate of a population parameter is a single value of a statistic.
For example, the sample mean x is a point estimate of the population mean μ. Similarly,
the sample proportion p is a point estimate of the population proportion P.
 Interval estimate. An interval estimate is defined by two numbers, between which a
population parameter is said to lie. For example, a < x < b is an interval estimate of the
population mean μ. It indicates that the population mean is greater than a but less than b.
Confidence Intervals
Statisticians use a confidence interval to express the precision and uncertainty associated with a
particular sampling method. A confidence interval consists of three parts.
 A confidence level.
 A statistic.
 A margin of error.
The confidence level describes the uncertainty of a sampling method. The statistic and the
margin of error define an interval estimate that describes the precision of the method. The
interval estimate of a confidence interval is defined by the sample statistic + margin of error.
For example, suppose we compute an interval estimate of a population parameter. We might
describe this interval estimate as a 95% confidence interval. This means that if we used the same
sampling method to select different samples and compute different interval estimates, the true
population parameter would fall within a range defined by the sample statistic + margin of
error 95% of the time.
Confidence intervals are preferred to point estimates, because confidence intervals indicate (a)
the precision of the estimate and (b) the uncertainty of the estimate.
Confidence Level
The probability part of a confidence interval is called a confidence level. The confidence level
describes the likelihood that a particular sampling method will produce a confidence interval that
includes the true population parameter.
Here is how to interpret a confidence level. Suppose we collected all possible samples from a
given population, and computed confidence intervals for each sample. Some confidence intervals
would include the true population parameter; others would not. A 95% confidence level means
that 95% of the intervals contain the true population parameter; a 90% confidence level means
that 90% of the intervals contain the population parameter; and so on.
Margin of Error
In a confidence interval, the range of values above and below the sample statistic is called
the margin of error.
For example, suppose the local newspaper conducts an election survey and reports that the
independent candidate will receive 30% of the vote. The newspaper states that the survey had a
5% margin of error and a confidence level of 95%. These findings result in the following
confidence interval: We are 95% confident that the independent candidate will receive between
25% and 35% of the vote.
Note: Many public opinion surveys report interval estimates, but not confidence intervals. They
provide the margin of error, but not the confidence level. To clearly interpret survey results you
need to know both! We are much more likely to accept survey findings if the confidence level is
high (say, 95%) than if it is low (say, 50%).
Consider the following results of 10 tosses of a coin: H, T, T, T, T, H, T, H, T, T a) Estimate the
probability of head (H) for this coin. b) Estimate the standard error of your estimate.
Let X denote the toss of a single coin. Further, let X = 1 if a head results, and X = 0 if a tail
results. This X is a Bernoulli (p) random variable, where p denotes the probability of head. Let pˆ
denote the estimator of p.
a) The estimated value of p is pˆ = (1 + 0 + 0 + . . . + 1 + 0 + 0)/10 = 0.3.
b) The estimated standard error of pˆ is √pˆ(1 − pˆ)/n) = √0.3(0.7)/10 = 0.14.
Suppose the following data shows the number of the problems from the Practice Problems Set
attempted in the past week by 10 randomly selected students: 2, 4, 0, 7, 1, 2, 0, 3, 2, 1.
a) Find the sample mean.
b) Find the sample variance.
c) Estimate the mean number of practice problems attempted by a student in the past week.
d) Estimate the standard error of the estimated mean.
a) X = Pn i=1 Xi/n = (2 + 4 + . . . + 2 + 1)/10 = 2.2
b) S^2=Σn i=1(Xi − X)^2/(n − 1) = (2 − 2.2)^2 + (4 − 2.2)^2 + . . . + (2 − 2.2)^2 + (1 −
2.2)^2/(10−1) = 4.4
c) The estimate is X = 2.2
d) Estimated standard error of X is S/√ n = √ 4.4/10 = 0.66
Unit - 17 : Bond Investment
Debt
DEBT means a sum of money due by certain and expresses agreement. In a less technical sense,
it means a claim for money. Loans from banks or financial institutions are one of the popular
forms of debt.
Bonds
Debt capital consists of mainly bonds and debentures. The holder of debt capital does not receive
a share of ownership of the company when they provide funds to the firm. Rather, when a
company first issues debt capital, the providers of debt capital purchase a debenture, which
involves lending money to the firm. In return for loaning this money, bond holders have a right
to certain guaranteed payments during the life of the bond.
For example : a company issued a bond of a face value of Rs. 100 carrying a coupon rate of 10
per cent for ten years. This entitles the bondholder to receive Rs. 10 (10 per cent of Rs. 100) for
ten years as interest. At the end of tenth year, the bondholder is also entitled to receive back the
invested amount of Rs. 100. Irrespective of the level of profits or losses, which company makes
during that period of ten years, the bondholder is entitled to receive the coupon interest during
that period.
Face Value: Also known as the par value and stated on the face of the bond. It represents the
amount borrowed by the firm, which it promises to repay after a specified period.
Coupon rate: A bond carries a specific rate of interest, which is also called as the coupon rate.
Maturity: A bond is issued for a specified period. It is to be repaid on maturity.
Redemption Value: The value, which the bondholder gets on maturity, is called the redemption
value. A bond is generally issued at a discount (less than par value) and redeemed at par.
Market Value: A bond may be traded on a stock exchange. Market value is the price at which
the bond is usually bought or sold in the market.
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Bond Value
A bond, whose par value is Rs. 1,000, bears a coupon rate of 12 per cent and has a maturity
period of 3 years. The required rate of return on the bond is 10 per cent. What is the value of this
bond?
Solution
Annual interest payable = 1,000 * 12% = 120
Principal repayment at the end of 3 years = Rs. 1,000
The value of the bond
= 120 (PVIFA 10%, 3 yrs) + Rs. 1,000 (PVIF 10%, 3 yrs)
= 120 (2.487)+1,000 (0.751)
= 298.44 + 751
= Rs. 1,049.44
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A bond, whose par value is Rs. 1000, bears a coupon rate of 12 per cent payable semi-annually
and has a maturity period of 3 years. The required rate of return on bond is 10 per cent. What is
the value of this bond?
Solution
Semi-annual interest payable = 1,000 x 12 per cent/2= 60
Principal repayment at the end of 3 years = Rs. 1,000
The value of the bond
= 60 (PVIFA 10%/2, 6 pds) + Rs. 1,000 (PVIF 10%/2, 6 pds) =
60 (5.0746) + 1,000 (0.746) = 304.48 + 746 = 1,050.48
………………………………………………………………………………………………………
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The face value of the bond is Rs. 1,000, coupon rate is 11 per cent, years to maturity is seven
years. The required rate of return is 13 per cent, and then the present value of the bond is
110 x PVIFA (13 per cent, 7) + 1,000 (PVIF 13 per cent, 7)
110(4.423)+1,000 (0.425) = 911.53
One year from now, when the maturity period will be six years, the present value of the bond
will be
110 x PVIFA (13 per cent, 6) + 1,000 (PVIF 13 per cent, 6)
110 (3.998) + 1,000 (0.480) = 919.78
Similarly, when maturity period is 5, 4, 3, 2, 1 the Bond value will become 929.87, 940.14,
952.71, 966.48, 982.35, respectively.
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CURRENT YIELD ON BOND
It measures the rate of return earned on a bond, if it is purchased at its current market price and if
the coupon interest is received.
Current yield = Coupon interest/current market price
If a bond of face value Rs. 1,000, carrying a coupon interest rate of 8 per cent, is quoted in the
market at Rs. 800, then the
Current yield of the bond is = 8 per cent * 1,000/800 = 10 per cent
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YIELD-TO-MATURITY OF BOND
It is the rate of return earned by an investor, who purchases a bond and holds it until the
maturity.
Numerical problems on YTM
Consider a Rs. 1,000 par value bond, whose current market price is Rs. 850/-. The bond carries a
coupon rate of 8 per cent and has the maturity period of nine years. What would be the rate of
return that an investor earns if he purchases the bond and holds until maturity?
Solution
If kd is the yield to maturity then,
850 = 80 (PVIFA kd per cent, 9 yrs) + 1,000 (PVIF kd, 9 yrs)
To calculate the value of kd, we have to try several values:
= 80 (PVIFA 12 per cent, 9) + 1,000 (PVIF 12 per cent, 9)
= 80x 5.328+ 1,000 x (0.361)
= 426.24 + 361 =787.24
Since, the above value is less than 850, we have to try with value less than 12 per cent. Let us try
with
kd =10 per cent
= 80 (PVIFA 10 per cent, 9) + 1,000 (PVIF 10 per cent, 9) = 80
x 5.759 + 1.000 * 0.424 = 884.72
From the above it is clear that kd lies between 10% and 12%. Now we have to use linear
interpolation in the range of 10% and 12%. Using it, we find that kd is equal to the following:
(884.72-850) / (884.72-787.24)
34.72 / 97.48 = 10%.+
.71=10.71%
Therefore, the yield to maturity is 10.71%
Unit - 18 : Linear Programming
Linear Programming – Decision Making:
1. This can be solved either ‘graphical’ or ‘simplex’ method.
2. Linear Programming refers to several related mathematical techniques that are used to
allocate limited resources among completing demands in an optimum way.
3. Some examples of resource and marketing constraints:
1. Bank may stipulate certain working capital requirements.
2. Market may not absorb the whole output
3. Capacity constraints
4. Labor availability
5. Raw Material availability
Unit - 19 : Simulation
1. Simulation is a way of studying effects of changes in the real system through models.
We manipulate a model of the system so that we came to know the end results, without
having to go through the problems in reality.
2. Queuing problems have been extensively studied through simulation.
3. Simulation is useful in training managers and workers in how the real system operates, in
demonstrating the effects of changes in system variables and real time control.
CAIIB - Advanced Bank Management - Mod - A : HRM in Banks
Unit - 20 : Fundamentals of Human Resource Management
The Perspective
An organisation is primarily a ramification of the fact that there is an interdependency implied in
the satisfaction of needs of individuals alongside with the achievement of organisational
objectives
•Formal or Informal
•Two streams of thoughts:
1. How to organise the activities most systematically and analytically so that specificity in
the work processes and operations can be brought about
2. How to understand an individual’s relation to a given activity now recognised as ‘work’
•Robert Owen (1771-1858): Advocate of better working conditions for ‘vital machines’
•Charles Babbage (1792-1871): Division of labour
•Frederick Taylor (1856-1915): Scientific Management Approach
1. Conducted ‘Division of Labour’ and ‘Time and Motion’ studies
•Elton Mayo: Howthorne Studies 1924-33
1. Pointed to various dimensions of human behaviour that were not considered to be of any
significance in the restricted approach taken earlier
•Followed by Human relations movement that replaced ‘rational-economic man’ by ‘social man’
perspective
•Later researchers like Chris Argyris, Abraham Maslow, Douglas McGregor and Frederick
Herzberg pointed out that individuals are motivated by other than monetary factors too
•Line managers are the delivery points
Development of People Management Functions
•A distinct managerial function since end of nineteenth century
1. Few organisations had the post of welfare secretary(also referred to as social secretaries)
•Experiment on group behaviour by Prof A K Rice in Ahmedabad Rice Mills in 1952
•The term personnel officer was perhaps first used in the chemical and pharmaceutical industries
in 1960s
•The concern for human element did not occur until the socio-psychological upheavels in the late
1920s and early 1930s
•Two major traditions or trends:
1. Hard headed, profit minded approach to utilisation of human resources
2. Social welfare viewpoint
RELATIONSHIP BETWEEN HRM & HRD AND THEIR STRUCTURES AND
FUNCTIONS
Labour and Welfare Department
Personnel Department
HR Department
Classification of HRM Activities
Administration and Maintenance (Personnel)
1. Conventional component of people management
2. Administration
3. Systems related to acquisition, promotion & evaluation, administration, salary and long
term benefits
4. Maintenance Systems
5. Traditional labour management, grievances and discipline management activities
Human Resource Development
1. Developmental systems such as induction and socialisation of the individuals,
development and growth, performance appraisal and counseling, career planning
2. Organisational interventions for climate development, employee and organisational
development
ROLE OF HR PROFESSIONALS
Supportive Role
1. Developing systems that deal with people, their problems and organisational dynamics
Systems Development and Research
1. Planning Future manpower, Recruiting, Utilizing by placement, Motivating, Retaining,
Integrating people and their role, Performance and potential assessment, Planning growth
of individuals etc
Managerial Role
1. Technical, managerial, helping, coping and processing competence
Developing Competence
1. Creating necessary culture and values in the organisation, diagnosing the problem at
organisational level and taking corrective steps
Process Role
1. Creating necessary culture and values in the organisation, diagnosing the problem at
organisational level and taking corrective steps
Critical Attributes
Technical
Knowledge of -
1. Performance Appraisal Systems and their functioning
2. Potential appraisal and mechanism of developing a system
3. Various tests and measurements of behaviour
4. Personnel and management
5. Behavioural Sciences
6. Career planning processes and practices
7. Counselling
8. Behavioural research techniques
9. Ability to design and coordinate training programmes at worker, supervisor and
managerial levels
10. Understanding of overall organisational culture
11. Counselling skills
Managerial
1. Organizing Ability
2. Systems Development Skills
Personality
1. Initiative
2. Faith in human beings and their capabilities
3. Positive attitude to others
4. Imagination and creativity
5. Concern for excellence
6. Concern for people and their development
7. Friendly, sociable and affable
8. Attitude for research and development work
9. Interest in learning new things
10. Ability to work as a team member
Competencies for HR Heads
Behavioural
1. Communication
2. Initiative
3. Drive
4. Creativity
5. Self-confidence
6. Teamwork
7. Influencing Ability
8. Problem Solving
9. Inter Personal Skills
Functional
1. Business Knowledge
2. Change Management
3. Diversity Management
4. Service Orientation
5. Execution Excellence
6. Financial perspective
7. Building expertise
8. Personal credibility
9. Relationship management
10. Strategic Thinking and Alignment
Strategic Role in the Future
1. To become a partner with senior and line managers in strategy execution, helping to
move planning from conference room to the market place
2. To become an expert in the way work is organized and executed, delivering
administrative efficiency to ensure that costs are reduced while quality is maintained
3. To become a champion for employees, vigorously representing their concerns to senior
management and at the same time, working to increase employee contribution
4. To become an agent of continuous transformation, shaping processes and a culture that
together improve an organisation’s capacity for change
Development of HR functions in India
1. During the British raj, the ripples of whatever happened were felt in India
2. Labour Welfare Officers under the Factories Act
3. By 1950s the provisions of the Industrial Disputes Act, 1947 began to percolate down
4. By 1960s demand for personnel professionals with specific knowledge about people
management systems and laws rose
5. Institutes were setup:
6. Indian Institute of Personnel Management (IIPM), 1947
7. National Institute of Labour Management
8. National Institute of personnel Management (NIPM), 1982: Formed upon merger of the
above two institutes
9. Indian Society for Training and Development , 1970
10. MNCs gave more attention to personnel issues based on home country experience
11. In India TISCO took proactive measures in the field
12. Govt. enacted legislations related to employment and employee welfare:
13. Article 16(1) of the Indian Constitution: Equal opportunity for employment
14. Apprentices Act, 1961: Training linked to employment
15. Child Labour Act, 1986
16. Bonded Labour System Act, 1976
17. Interstate Migrant Workmen Act, 1979
18. Next major transformation in 1980s with the onset of the HRD era
19. Establishment of National HRD network in 1985
Unit - 21 : Development of Human Resources
HRD and its subsystems
1. Organized learning experience in a definite time period to increase the possibility of
improving job performance growth
2. A process by which employees of an organisation are helped in a continuous and planned
way to:
3. Acquire or sharpen capabilities required to perform various functions associated with
their present or expected future jobs
4. Develop their general capabilities as individuals and discover and exploit their own inner
potential for their own and/or organisational development purpose
5. Develop an organisational culture in which supervisor-subordinate relationships,
teamwork and collaboration among subunits are strong and contribute to the professional
well-being, motivation and pride of employees
Goals of HRD
To develop:
1. Capabilities of each employee as an individual
2. Capabilities of each individual in relation to his or her present role
3. Capabilities of each employee in relation to his or her expected future role(s)
4. Dyadic relationship between each employee and his/her supervisor
5. Team spirit and functioning in every organisational unit (department, group etc)
6. Collaboration among different units of the organisation
7. Organisation’s overall health and self-renewing capabilities, which, in turn increase the
enabling capabilities of individuals, dyad teams, and the entire organisation
Job/Role Analysis
Job Description
1. List of requirements: Skills, Qualifications etc. for performing the job
Job Specifications
1. Used to compare two jobs within an organisation or between organisations or even an
industry
Job Evaluation
1. Used to compare two jobs within an organisation or between organisations or even an
industry
Task
1. Complex system of tasks
2. Requires a person to achieve an overall product
3. The relationship is irrelevant
Job
1. Puts an individual in a hierarchical position
Position
1. Emphasises on the pattern of mutual expectations
Role
1. Goes a step further to encompass socio-psychological relationship
Work
1. Goes a step further to encompass socio-psychological relationship
Training and Development – Role and Impact of Training
Involves:
1. Identification of Training Needs
2. Conducting the training
3. Evaluation of Training
4. Selection and development of trainers
Purpose of Training and Development
Training
1. Improved performance of individual on his present job
2. Learning related to present job
Education
1. His preparation for an identified job in a not too distant future
2. Learning to prepare the individual for a different but identified job
3. General Learning
Development
1. His general growth (development) not related to any specific job
2. Learning for growth of the individual not related to a specific present or future job
3. Futuristic Learning
Importance of clarity of purpose
1. Purpose will determine the choice as shown earlier
2. It will make the expected outcomes clear to both the parties
3. Helps in identifying who is responsible for what activity
Imperatives of Adult Learning
1. Andragogy – Adult learning process. Analogous to pedagogy
1. A cooperative venture in non-authoritarian, informal learning, the chief purpose of which
is to discover the meaning of experience, a quest of mind which digs down to the roots of
the preconceptions which formulate our conduct; a technique of learning for adults which
makes education coterminous with life and hence elevates living itself to the level of
adventurous experiment.
Learning Theories
Mechanistic (or Behaviorist) Theories
1. Hold that learner is passive in the learning process
2. Every input/stimulus will get a predetermined response
3. Learning occurs when a learner is conditioned to give the ‘right’ response to a given
stimulus
4. Mechanistic (or Behaviorist) Theories
Cognitive Theories
1. Equate man with his brain – humans are capable of critical thinking and problem solving
2. Purpose of learning is to teach the brain to engage in such critical thinking and problem
solving
Cognitive Theories
1. Organismic (or Humanistic) Theories
2. Learning occurs when learners have ‘freedom to learn’ what is particularly relevant to
their personal life situation
3. Purpose of learning is to encourage each individual to develop his or her full, unique
potential
Variables associated with actual Teaching-Learning situation
1. Learning is enhanced when learner is motivated
2. Learning requires feedback
3. Reinforcement increases the likelihood that a learned behaviour will be repeated
4. Practice increases a learner’s performance
5. Learning must be transferable to the job
Systematic Approach to Learning (SAT)
1. Will the training be done internally or externally?
2. How much and what kind of training will be done externally and is this also an essential
part?
3. Who are the functionaries responsible for administering the training system?
SAT – The process
1. Training Need Analysis(TNA) and Identification of Training Needs
2. Preparation of a Training Plan
3. Conduct of the Training
(including designing the programme)
1. Evaluation of the Training Programme and the plan
(Reaction Level, Learning Level, Behaviour Level and Functioning Level)
1. Selection and Development of Trainers
Support systems for Training and Development
1. Performance Appraisal System
2. Human Resource Information System
3. Organisational Culture
Attitude Development
1. Persistent tendency to feel and behave in a particular way towards some object
2. Characteristics:
3. Tends to persist unless something is done to change it
4. Can fall anywhere in the continuum from very favourable to very unfavourable or
positive to negative
5. Directed towards some object about which a person has perception, feelings and beliefs,
which may result in emotionally charged opinion and prejudices
Components of Attitudes
Emotional Component
1. Person’s feelings or their effect – positive, neutral or negative – about an object
2. Expression of emotions, whether positive or negative, is important to work behaviour
Information Component
1. Beliefs and information that an individual has about an object
2. Usually founded on insufficient observations or opinions which may not be empirically
correct
Behavioural Component
1. Person’s tendency to behave in a particular way towards the object
Significance of Attitude at Workplace
Adjustment Function
1. Help people adjust to their work environment
Ego-defensive Function
1. Help people defend their self-image
Value-Expression Function
1. Provide people a basis for expressing their values
2. Helps to subscribe to the ethics
Knowledge Function
1. Help supply standards and frames of reference that allow people to organise and explain
the world around them
2. Regardless of how accurate a person’s view of reality is, attitudes toward people, event
and objects impact the sense the individual makes out of what is going on.
Changing Attitudes
Barriers to attitude change:
1. Prior commitment to a particular thing
2. Insufficient information
Overcoming the Barriers to attitude change:
1. Use of Fear
2. Provide New Information
3. Resolving discrepancies between attitude and behaviour
4. Influence of peers, friends and opinion leaders Co-Opting – Getting the dissatisfied
people involved in improvement process
Career Path Planning
The idea behind Career Path Planning
1. Individuals desire and expect change at certain stages in life
2. There is a (predictable) pattern in these changes
3. There is a feeling of frustration if things do not happen as desired or expected
Life (Adulthood) Stages
Adolescence
1. Individual’s development is to achieve an ego identity
2. A reconciliation process of what he perceives himself to be, what he thinks others
perceive him to be and make an adjusted assessment to form his identity
Young Adulthood
1. Starts developing relationship with individuals, groups (interest group or work group) or
occupation.
Adulthood
1. Guiding the next generation
2. Passing on the knowledge, values or sponsoring the younger colleagues
Maturity
1. Person attempts to achieve ego integrity by examining whether life has been meaningful
or satisfying
Career Roles
Apprentice
1. Beginning of the career
2. Does routine work under the supervision of the mentor
3. Needs to accommodate himself to a certain level of dependency
Colleague
1. Beginning of making independent contribution
2. Less dependence on superiors for advice and direction
Mentors
1. Beginning of complex functions
2. Individual develops ideas, manages others and must learn to assume responsibility for
subordinates’ work
Sponsors
1. Needs to broaden perspective and think long term
2. Needs to define the direction in which the entire organisation or atleast a major segment
would develop
3. Needs to develop the capability to choose the right people in the organisation who can
support the process of influencing
Career Concepts
Linear Career Concept
1. Plan for upward movement within the same profession using organisational hierarchy
Steady State Career
1. Individuals choose a profession, acquire higher skills, but do not choose to go higher up
in the hierarchy
Transitory Pattern
1. Individuals shift from one job to another not necessarily related to the previous one
Spiral Career
1. Individuals take on a new job, work hard, perform well, move up in the status and rank,
then move on to another type of work and follow the same pattern of development and
performance
Plateau Career
1. Reaching a level higher than where one started but then continuing on the same level
Career Path
1. When these movements are predetermined in a logical sequence to enable an individual
to have knowledge of all activities of the organisation (horizontal movement), different
perspectives of management (field and controlling) and different levels of management
(heirarchial) it could be said that the organisation has developed a career path
1. With an established Career Path Planning Subsystem the organisation can have a
continuous supply of individuals with required capabilities for future roles
Components of Career Anchors
1. Self perception of talents and abilities based on one’s performance
2. Self perceived motives and needs based on self diagnosis and feedback
3. Self perceived attitudes and values based on interactions with the norms and values
implicit in the organisation
Schein’s Career Anchors
Technical/Functional Competence
1. ‘in love’ with a particular field or function
Managerial Competence
1. Early experiences indicate an individual will be able to rise in the management hierarchy
Security
1. Secure work environment and career
Creativity
1. Desire to create something new
Autonomy
1. Some find organisational life unpleasant or difficult. Prefer to maintain their freedom
Career Path Planning System
Main responsibilities of the organisation while developing and implementing a career plan are:
1. The policy of career planning is made explicit. It lays down the benchmarks for
performance at critical stages which the employees must attain
2. It is made clear that the career path is a facility for growth and not a right for
advancement
3. The career path – a sequence of job assignments, training requirements and promotion to
higher level – is made known to the employees from the time of entry. Performance
feedback is a part of the career path
4. The career path is followed uniformly for all employees without any bias/prejudices
5. It should be flexible to accommodate variations which may be needed to deal with the
given circumstances
Career Path Planning Process
1. Define the career stages (Role) in relation to the organisational levels
2. Identify the core jobs at each level
3. Define and spell out the criteria for each successive level
4. Placement in the next career role
Multiple Careers in one organisation
1. In flatter organisations hierarchy is neither desired, nor available
2. What is needed is to develop expertise in different areas
3. The concept of spiral careers is becoming an ideal one in this situation
………………………………………………………………………………………………………
………………………
Self Development
Self development essentially refers to developing a mature personality who can handle different
tasks and situations with comparative ease. Process of discovering and utilising the tremendous
potential within one’s individual personality
Patent Self
1. External self comprising individual’s identity and physical features
Inner Self
1. Signifies the behavior patterns, values and other psychological factors including strengths
and weaknesses
Aspects of Self Development in relation to an organisation Individual Level
Individual Level
1. Motivational Pattern
2. Locus of Control
3. Power Bases
Interpersonal Level
1. Interpersonal Needs
2. Transactional Analysis
Group Level
1. Being effective member in the work group
Locus of Control
1. Belief of an individual about who is responsible for what happens in life
2. Types:
3. External: Believe that events are determined by external forces like other influential
persons in society, luck, destiny and so on
4. Internal: Believe individuals can determine events
5. Motivation has to come from with in for real growth. Internal locus of control ensures
growth
Power Bases
1. Power: A person’s potential to get others to do what he or she wants them to do, as well
as avoid being forced to do what he or she does not want to do
2. Types:
3. Coercive Bases: Organisational position, punishment, charisma, personal relationship,
closeness to a source of power, withholding information on resources
4. Persuasive Bases: Expertise, competence and modelling
Interpersonal interactions: Dyadic relationship
1. In organisations most of the situations imply interacting with and influencing others
2. Dyad: Two individuals maintaining a sociologically significant relationship -
Interpersonal relationship
3. Underlying concepts:
4. Interpersonal Needs
5. Interpersonal Interactions (Transactional Analysis)
Interpersonal Needs
Need for Inclusion
1. To establish and maintain a satisfactory relationship with people with respect to
interaction and association
Need to Control
1. To establish and maintain satisfactory relationship including:
2. Psychologically comfortable relationship in controlling all behaviour of other people
3. Eliciting behaviour from them which controls one’s own behaviour
Need for Affection
Transactional Analysis (TA)
1. Ego states: ‘consistent pattern of feeling and experience directly related to a
corresponding consistent pattern of behaviour’
Parent
1. Regulates behaviour and nurtures it
2. Ethical, conscientious behaviour
3. Influenced by preaching’s from parents and elders
Adult
1. Collects information and processes it
2. Analytical, rational and practical orientation
Child
1. Concerned with creativity, curiosity, reactions to others and adjusting behaviour (Little
Professor)
2. Instinctive behaviour with motive of enjoyment
TA - Types of Transactions
1. Complementary (Most Desirable)
2. Crossed (Not Desirable)
3. Angular
4. Duplex
TA - Life Positions
1. I AM OK YOU ARE OK (Ideal Situation)
2. I AM OK YOU ARE NOT OK
3. I AM NOT OK YOU ARE OK
4. I AM NOT OK YOU ARE NOT OK
5. I AM OK YOU ARE OK THEY ARE NOT OK
Working in Teams
1. Team: A group of people with high degree of interdependence geared towards the
achievement of a goal or the completion of task
2. Group Dynamics:
3. Internal nature of groups
4. How they form
5. Their structure and processes
6. How they function and affect individuals and organisation
Stages in Group Formation and Behaviour
1. Forming (Awareness) Members with varied awareness get acquainted, understand the
team’s goal and its role
2. Storming (Conflict) Conflict among the members helps the team in defining itself
3. Norming (Cooperation) How the task will be accomplished? Rules and regulations of the
team?
4. Conforming (Adjustment) Adjusting one with the team expectations and norms
5. Performing (Productivity) Members behave in mature fashion and focus on
accomplishing their goal. Full energy dedicated to work.
Self-Awareness
1. Understanding self helps in the process of self-development
2. Johari Window by Luft and Ingham
3. The more one knows oneself, the better equipped he is to face challenges
KNOWN TO
SELF
NOT KNOWN TO SELF
KNOWN TO OTHERS ARENA BLIND
NOT KNOWN TO OTHERS CLOSED DARK
Emotional Intelligence
1. Abilities such as being able to motivate oneself and persist in the face of frustration, to
control impulse and delay gratification, to regulate one’s moods and keep away distress
from swamping the ability to think, to empathise and to hope.
2. Unlike IQ, EQ grows throughout adulthood
Five components of Emotional Intelligence
Self Awareness
1. Ability to recognize, understand one’s mood, emotions and drives, as well as their effects
on others
Self-Regulation
1. Ability to control or redirect disruptive impulses and moods and propensity to suspend
judgement – to think before acting
Self-Motivation
1. Passion to work for reasons that go beyond money or status and propensity to pursue
goals with energy and persistence
Empathy
1. Ability to understand the emotional make up of others and skill to treat people according
to their emotional reactions
Social Skills
1. Proficiency in managing relationships and building networks and ability to find common
ground and build rapport
Morale
1. The morale denotes a spirit as of dedication to a common goal that unites a group
2. Displays the emotional or mental condition w.r.t. cheerfulness, confidence, zeal etc
3. High morale translates into positive motivation, increased productivity, exceeding
expectations for performance and happy employees
Employee Morale Boosters
1. Welcome Ideas
2. Keep Score
3. Inspect Thank You Notes
4. Huddle
5. Open Up
6. Have Fun
7. Show Charity
8. Add Perks
9. Fire Staff
10. Measure It
11. Unit - 22 : Human Implications of Organizations
12. HUMAN BEHAVIOUR AND INDIVIDUAL DIFFERENCES
13. The behaviour of an individual is influenced by several factors. These can be grouped
under the following heads:
14. 1. Environmental Factors: (a) Economic, (b) Social (norms and cultural values), and (c)
Political;
2. Personal Factors: (a) Age, (b) Sex, (c) Education, (d) Abilities, (e) Marital Status, (f)
No. of dependants;
3. Organizational Factors: (a) Physical Facilities, (b) Organization Structure and
Design, (c) Leadership, (d) Compensation and Reward System; and
4. Psychological Factors: (a) Personality, (b) Perception, (c) Attitudes, (d) Values. (e)
Learning.
15. EMPLOYEES BEHAVIOUR AT WORK
16. There are some basic assumptions about human behaviour at work:
17. 1. There are differences between individuals.
2. Concept of a whole person.
3. Behaviour of an individual is caused.
4. An individual has dignity.
5. Organizations are social systems.
6. There is mutuality of interest among organizational members.
7. Organization behaviour is holistic.
18. While the first four concepts centred around people, the next two are concerned with
organizations. The last one is a combination of the first six assumptions.
19. Persons differ and again, there are certain 'commonalities' in the persons. Every person is,
in certain respects,
1. like all other persons,
2. like some other persons, and
3. like no other person.
20. By understanding certain dimensions of personality and behaviour, managers can, to a
great extent, predict the likely behaviour in terms of actions and outcomes of actions in
respect of employees. There are several theories to explain the concept of personality.
One dimension of personality which is getting attention both from organizational as well
as medical researchers is the Type A and Type B behaviour profiles.
21. A person exhibiting Type A behaviour is generally restless, impatient with a desire for
quick achievement and perfectionism.
Type 'B' personality people are much more easy going, relaxed about time pressure, less
competitive and more philosophical in nature.
22. Friedman, Meyer and Ray Roseman have mentioned the following characteristics of
Type A personality:
23. 1. Restless by nature, so that he always moves, walks and eats rapidly.
2. Is impatient with the pace of things, dislikes waiting and is impatient with those who
are not impatient.
3. Multitasker – does several things at once.
4. Tries to schedule more and more in less and less time, irrespective of whether
everything is done or not.
5. Usually does not complete one thing before starting on another.
6. Often displays nervous gestures such as clenched fist and banging on a table.
7. Does not have time to relax and enjoy life.
24. Type B personality exhibits just the opposite characteristics and is more relaxed, sociable
and has a balanced outlook on life.
25. Erikson has identified eight developmental stages in explaining the personality. These
stages which are based on a person's state of mind at a given point of time are mentioned
below:
26. Stage 1: Trust versus Mistrust
Stage 2: Autonomy versus Shame and Doubt
Stage 3: Initiative versus Guilt
Stale 4: lndustry versus Inferiority
Stage 5: Identity versus Role Diffusion
Stage 6: Intimacy versus Isolation
Stage 7: Growth versus Stagnation
Stage 8: Integrity versus Despair
………………………………………………………………………………………………
………………………………
27. THEORIES OF MOTIVATION AND THEIR PRACTICAL IMPLICATIONS
28. What is Motivation?
Motivation in an organizational context is referred as 'the extent of willingness of an
employee to respond to the organizational requirements'. Motivation is generally
directed, consciously or unconsciously, towards satisfaction of needs (motives).
Motivation as a behavioural concept is of great interest to the executives and managers in
organizations today.
29. Theories of Motivation
The various theories of motivation are:
1. Scientific Management or Rational Economic View
2. Human Relations Model
3. Abraham Maslow's Need Hierarchy Theory
4. Frederick Herzberg's Two-Factor Theory
5. Clayton Alderfer's ERG Theory
6. Achievement Motivation Theory
7. Victor H Vroom's Expectancy Model
8. James Stacy Adams' Equity Theory
9. Lyman W. Porter and Edward E Lawler - Performance Satisfaction Model.
10. Reinforcement Theory
(Go through all the 10 theories)
30. Motivation and Behaviour
Behaviour of an individual is generally motivated by a desire to achieve some goal.
Behaviour is either an 'activity' or, 'a series of activities'. Each activity is supported by
motivation. Individuals differ not only in their ability to do but also in their will to do, or
motivation. Motives are sometimes defined as needs, wants, drives, or impulses within
the individual. These are directed towards goals, which may be conscious or
subconscious. Goals are outside an individual. Goals are sometimes referred to as 'hoped
for' rewards towards which motives are directed.
31. Motivation to Work
Manager should also know specific ways and techniques to motivate employees in the
work situation. Most of these techniques are practical in nature and can be adopted by
him in the normal course. Some of the frequently used common incentives in
organizations are :
32. Money, appreciation, job enlargement, job enrichment, job rotation, participative
management, and quality of work.
33. Factors contribute to the quality of work life:
34. 1. Adequate and fair compensation.
2. A safe and healthy environment.
3. Jobs aimed at developing and using employee's skills and abilities.
4. Growth and security; jobs aimed at expanding employees' capabilities rather than
leading to their obsolescence.
5. An environment in which employees develop self-esteem and a sense of identity.
6. Protection and respect for employee's rights to privacy, dissent, equity. etc.
7. A sensible integration of job career and family life and leisure time.
35. Role Set Conflicts
36. The role set consists of important persons who have different expectations from the role
that an individual occupies. The conflicts arise due to incompatibility among the
expectations of significant others and the individual himself. These role set conflicts take
the following forms:
37. 1. Role ambiguity
2. Role Expectation Conflict
3. Role Overload
4. Role Erosion
5. Resource Inadequacy
6. Personal Inadequacy
7. Role Isolation
38. Unit - 23 : Employees’ Feedback and Reward System
39. Feedback Through Climate Surveys
40. Organizations used to measuring employees' perceptions of the prevailing climate in an
organization are called climate surveys. The coverage of a typical survey can be as
follows:
41. 1. Structure: The feeling that employees have about the constraints on the groups, rules,
regulations, procedures, communications channels (layers in decision making),
delegation and authority, etc.
2. Responsibility: The feeling of being your own boss, clarity of role and responsibility
vis-a-vis superior, subordinates and peers, etc.
3. Reward: The feeling of being rewarded for a job done well, perception about reward
and punishment system, perception about pay and promotion, etc.
4. Risk: The sense of riskiness and challenge in the job and in the organization, and any
emphasis on taking calculated risk (risk taking is encouraged and bona fide errors are
protected) or playing safe is encouraged and accepted.
5. Warmth: The general feeling of fellowship that prevails in the workgroup atmosphere,
the prevalence of informal supporting culture and social groups.
6. Support: The perception about helpfulness of managers and other employees in the
group, emphasis on mutual support from above and below in the heirarchy.
7. Standards: The perceived importance of implicit and explicit goals and performance
standards, the emphasis on doing a good job, the challenge represented in personal and
group goals.
8. Conflict: The feeling that the managers and other workers want to hear different
opinions, the process of conflict resolution, opportunity to express the views, etc.
9. Identity: The feeling of belonging to the organization and perceived value in the
organization and work group, etc.
42.
REWARD AND COMPENSATION SYSTEM
43. The wages in the form of compensation is viewed as the main attraction to join or change
a job. The compensation should not be so meager that employees do not feel motivated to
put in their best. the compensation should be such that it continually attracts talent, it is a
major source of retention of the existing manpower and has an edge which motivates
them to give their best.
44. Types of Compensations
45. Compensation is expressed in terms of money. It would thus include: wages or salary,
bonus, cash allowances and benefits such as accident, health insurance cover, employer's
contribution to the retirement funds, provision of accommodation, etc. The jobs are
broadly classified in four groups and the compensation for them is commonly referred to
as shown below:
46. 1. Managerial (top, middle, junior) ... remuneration
2. Supervisory ... salary
3. Clerical or Administrative ... salary
4. Unskilled, semi-skilled, skilled and highly skilled ... wages
47. Compensation Base
48. Compensation policy is an important element in personnel management. What is the
basis or factors on which compensation gets decided? It could be:
49. 1. Company objectives
2. Market situation or prevailing market rate
3. Internal and external pressures.
50. A good compensation package should cover factors like adequacy, societal
considerations, supply and demand position, fairness, equal pay for equal work and job
evaluation.
51. The administration is bound to protect the workforce from irrationally low wages. Taking
this as the prime objective the Indian Government has enacted:
52. 1. The Payment of Wages Act, 1936,
2. The Minimum Wages Act, 1948
3. The Payment of Bonus Act, 1965, and
4. The Equal Remuneration Act, 1976.
53. Unit - 24 : Performance Management - Part 1
54. performance appraisal is an important tool by which the organizations review employee
performance, take corrective steps through training, interventions or placement decisions,
reward good performance and attempt to take the employee performance to a higher
level.
55. Objectives of Performance Appraisal System
56. 1. Judgemental - for salary increases, transfers and promotions;
2. Developmental - telling an employee how is he doing and suggesting changes in his
skills, attitudes, behaviour;
3. Counseling by superior - for giving feedback and understanding problems for poor
performance.
57. Uses of Performance Appraisal
1. It rates all the employees in a unified manner by using the same rating scales and thus
making them comparable on a common footing.
2. It provides information which could be critical while deciding on promotion, pay
increases, transfers, training, etc.
3. It provides information about the areas of weaknesses of the employee to enable
initiation of corrective steps.
4. It improves the quality of supervision as the supervisor becomes a keen observer.
5. The system, if implemented with openness and trust, ensures better interpersonal
relations between the employee and his supervisor.
58.
Performance Appraisal Methods
59. Traditional Methods
1. Free Form Essay Method
2. Straight Ranking Method
3. Comparison Method
4. Grading Method
5. Graphic or Linear Rating Scales
6. Forced Choice Description Method
7. Forced Distribution Method
8. Group Appraisal Method
60. Modern Methods
1. Assessment Centre Workshops
2. Management by Objectives
3. Human Asset Accounting Method
4. Behaviourally Anchored Rating Scales
5. 360 Degree Appraisal Method
61. Performance Appraisal versus Confidential Report
62. In a large number of organizations the annual performance appraisal exercise is carried
out as a confidential activity. In fact, the form in which the performance of the employee
is evaluated and reported is called confidential report.
63. Merits and Demerits of performance appraisal system
64. The merits are:
1. It reveals a concern for performance and creates an atmosphere of openness and trust
in the organization.
2. Gives feedback to the employee and ensures that corrective steps are taken in time.
3. It raises the general motivation level of the employees if implemented properly.
65. The demerits are:
1. The halo effect — a tendency to allow one trait or characteristic of an employee to
influence the assessment. The halo is to rate an employee consistently high or low.
2. The leniency or strictness tendency of the superior interferes with the appraisal and
accordingly the assessment gets influenced. The superior is unable to come out of these
tendencies.
3. The central tendency problem refers to assigning average ratings to all the employees
without properly evaluating each aspect of appraisal carefully and fearlessly.
4. Similar error is the tendency of comparing the employee with oneself on various traits
and parameters. Those who show the similar characteristics are normally rated high.
Unit - 25 : HRM and Information Technology
Globalisation has removed all the physical, and national boundaries by linking organizations
from all parts of the world, by use of IT. HRM as a function has dual responsibility to respond to
the developments having taken place in the area of information technology (IT), for
transformation of the mind set of all individuals across the organization and also use of IT in day
to day decision process.
The banking sector has absorbed maximum technology for their operations. IT has offered a
variety of delivery channels to support customers' needs in an efficient and effective manner.
Role of IT in HRM
There is lot of scope for use of IT in whole range of HRM functions i.e. recruitment, training,
placement, appraisal and reward system, organizational development initiatives etc. The need for
use of IT can be seen through the following: i. Basic information about employee used within the
organization. New dimensions have been added to employee data such as training, competencies,
skills, expectations etc. Updation of employees data HRD decisions are data-based now and IT
provides that data. Adherence to statutory requirements. As per Nadler: i. Massive influx of
technology into workplace presents great challenge in keeping the workforce's v.-crk and
knowledge base current and avoid workforce obsolescence New tools disrupt traditional work
patterns and can have demoralizing effect. HRD effort must align to the corporate planning.
HRD efforts would be examined in terms of contributing to high performance work unit and
demonstrating results.
HR Information and Database Management
Computer based data can enhance the quality of decision making. A typical HR information
system includes the following types of data: The need for use of IT can be seen through the
following: i. Bio-data, Educational qualification, Professional qualification Organisational
history (entry level, promotion, placements, training, performance appraisal, competencies,
Salary & allowances.
The above type of data, requires few changes over a time period. But the data base provides lot
of information as input for decision making.
HR Research : Research in HRM can be undertaken to understand: trends of existing systems
like recruitment, promotion, training, appraisal system etc. to understand the workforce in terms
of motivation, commitment, expectation, frustration etc. to remain sensitive to internal
environment, regular opinion surveys, benchmarking, climate studies etc. can be conducted.
KnowledgeManagement (KM) : KM refers to process of (a) creating, (b) storing (c)
distributing and (d) pooling the knowledge (as per Wilcox-1997).The people in a system are the
sources of creating knowledge while storing and distributing the information is the responsibility
of the information technology machinery of the organization. Hence management of 'knowledge
worker' is very critical issue and cannot be done by traditional, bureaucratic process. Knowledge
management has gained prominence in the light of the uncertainty that the employee who has
created the knowledge, will continue with the organization or not, particularly where the
attritions le77els are higher.
Use of technology in training : The technology offers an opportunity in designing training
interventions to suit the individual learners. Important features are :
1. Mass learning user friendly material can be produces at low cost.
2. Trainers and trainees can be physically separated.
3. Trainee has the option to choose time and date and place and convenience form for
learning.
Technology based training methods help in distance learning.
Advantages of E-Learning :
1. Trainee can choose his own time and place to learn.
2. Trainee can learn at his own pace.
3. Trainee can check his understanding It is highly cost effective.
Disadvantages of E-Learning :
1. Inflexible as program is pre-produced.
2. It needs greater self discipline.
3. It can produce a sense of isolation If turnover is low.
4. It can prove expensive due to high cost of hardware and software
Unit - 25 : HRM and Information Technology
Globalisation has removed all the physical, and national boundaries by linking organizations
from all parts of the world, by use of IT. HRM as a function has dual responsibility to respond to
the developments having taken place in the area of information technology (IT), for
transformation of the mind set of all individuals across the organization and also use of IT in day
to day decision process.
The banking sector has absorbed maximum technology for their operations. IT has offered a
variety of delivery channels to support customers' needs in an efficient and effective manner.
Role of IT in HRM
There is lot of scope for use of IT in whole range of HRM functions i.e. recruitment, training,
placement, appraisal and reward system, organizational development initiatives etc. The need for
use of IT can be seen through the following: i. Basic information about employee used within the
organization. New dimensions have been added to employee data such as training, competencies,
skills, expectations etc. Updation of employees data HRD decisions are data-based now and IT
provides that data. Adherence to statutory requirements. As per Nadler: i. Massive influx of
technology into workplace presents great challenge in keeping the workforce's v.-crk and
knowledge base current and avoid workforce obsolescence New tools disrupt traditional work
patterns and can have demoralizing effect. HRD effort must align to the corporate planning.
HRD efforts would be examined in terms of contributing to high performance work unit and
demonstrating results.
HR Information and Database Management
Computer based data can enhance the quality of decision making. A typical HR information
system includes the following types of data: The need for use of IT can be seen through the
following: i. Bio-data, Educational qualification, Professional qualification Organisational
history (entry level, promotion, placements, training, performance appraisal, competencies,
Salary & allowances.
The above type of data, requires few changes over a time period. But the data base provides lot
of information as input for decision making.
HR Research : Research in HRM can be undertaken to understand: trends of existing systems
like recruitment, promotion, training, appraisal system etc. to understand the workforce in terms
of motivation, commitment, expectation, frustration etc. to remain sensitive to internal
environment, regular opinion surveys, benchmarking, climate studies etc. can be conducted.
KnowledgeManagement (KM) : KM refers to process of (a) creating, (b) storing (c)
distributing and (d) pooling the knowledge (as per Wilcox-1997).The people in a system are the
sources of creating knowledge while storing and distributing the information is the responsibility
of the information technology machinery of the organization. Hence management of 'knowledge
worker' is very critical issue and cannot be done by traditional, bureaucratic process. Knowledge
management has gained prominence in the light of the uncertainty that the employee who has
created the knowledge, will continue with the organization or not, particularly where the
attritions le77els are higher.
Use of technology in training : The technology offers an opportunity in designing training
interventions to suit the individual learners. Important features are :
1. Mass learning user friendly material can be produces at low cost.
2. Trainers and trainees can be physically separated.
3. Trainee has the option to choose time and date and place and convenience form for
learning.
Technology based training methods help in distance learning.
Advantages of E-Learning :
1. Trainee can choose his own time and place to learn.
2. Trainee can learn at his own pace.
3. Trainee can check his understanding It is highly cost effective.
Disadvantages of E-Learning :
1. Inflexible as program is pre-produced.
2. It needs greater self discipline.
3. It can produce a sense of isolation If turnover is low.
4. It can prove expensive due to high cost of hardware and software
CAIIB - Advanced Bank Management - Mod - A : Credit Management
Unit - 26 : Overview of Credit Management
Bank's loan policies, and other aspects of credit management, are influenced to a great extent by
these unwritten principles, which are as under:
1. safety of funds
2. purpose
4. liquidity
3. profitability
5. security
6. risk spread
A borrower can be:
1. An individual
2. Sole proprietary firm
3. Partnership firm and joint ventures
4. Hindu undivided family
5. Companies
6. Statutory corporations
7. Trusts and co-operative Societies
The laws applicable to all these different kinds of borrowers are different.
Type of Borrower - Applicable Law
Individuals - Indian Contract Act
Partnership firms - Indian Partnership Act
Hindu undivided family - Customary laws pertaining to Hindus
Companies - Companies Act
Statutory corporations - Acts that created them
Trusts - Indian Trusts Act, Public Trusts Act, Religious
and Charitable Endowments Act, Wakf Act
Co-operative Societies - Co-operative Societies Act or Societies Registration Act.
Types of Credit
Fund Based Non-Fund Based
Actual transfer of money from the bank to the
borrower
there is no transfer of money, but the
commitment by the bank on behalf of the
client, may result in future transfer of money to
the beneficiary of such a commitment
Can be divided into short term credit or long
term credit
Example - bank guarantee, letters of credit, coacceptance
of bills, forward contracts, and
derivatives
Working Capital, Project Finance, Export Finance, Crop Loan
BUSINESS SEGMENTS
1. Treasury
2. Corporate/wholesale banking
3. Retail banking
4. Other banking business
Components of Credit Management
Loan Policy of the Bank
1. Influenced by market conditions, policies of other banks, own SWOT analysis, RBI
guidelines
2. Exposure limits-single borrower/group
3. Exposure limits for sectors
4. Discretionary powers
Credit Appraisal
1. Five Cs - Character, Capacity, Capital, Conditions and Collaterals
2. Credit delivery-documentation, creation of charges
3. Control and Monitoring
4. Rehabilitation and Recovery
5. Risk management-identification,
6. Measurement & Evaluation
Delivery
Control and Monitoring
Rehabilitation and Recovery
Credit Risk Management
Refinance
RBI Guidelines
1. End use of funds
2. Priority sector 40%(agr 18%),weaker sector 10% foreign banks 32%, small enterprises
10%, export credit 12% of ANBC/off balance sheet expo, whichever is higher. Agr,
MSE, housing(20 lacs), Education(10 lacs/20 lacs abroad), Export credit, SHG, KVI,
Retail
3. Weaker sec. –small/marginal farmers, artisans, SGSY, SC/ST, DRI, SJSRY, SLRS, SHG
4. Micro, small and medium enterprises
5. Mfg sec: Micro upto 25 lacs, Small 25 lacs to 5 crs, Medium 5 crs to 10 crs
6. Service : Rs 10 lacs, 10-2 crs, 2-5 crs
Credit Exposure Norms –
1. For individuals/groups : 15/40 of capital funds- addl 5/10 for infra.
2. NBFC/NBFC-AFC 10/15%- 15/20% on lent infra
Base Rate System
1. Wef 1/7/2010 replaced BPLR
2. Banks may determine actual roi
3. Transparent, applicable to all except DRI, bank’s own employees, against deposits, qtrly
review of BR
4. Existing loans with BPLR to continue, switch over option to be given
Credit Restrictions
1. Adv against bank’s own shares
2. Relatives of directors/sr officers
3. Industries consuming ozone depleting substances
4. Sensitive commodities
5. FDRs of other banks/CD
6. Buy back of shares
Credit Assessment/Delivery
1. MPBF method
2. For SME upto 5 crs limits turnover method
3. Working capital above 10 crs , loan component 80%
4. For seasonal/cyclical industrial bank may exempt with approval of board.
Fair practices code
Pertains to
1. Loan application, processing
2. Appraisal, terms and conditions
3. Disbursement
4. Post sanction supervision
5. Discrimination, harassment in recovery, takeover of accounts
Unit 27 – Analysis of Financial Statements
Financial statements
1. Balance-sheet
2. P&l a/c / income & expenditure a/c
3. Auditors report
4. Fund flow statement/cash flow - AS 3 std makes compulsory for listed/to above 50 cr
cos. As-17 – segmentwise reporting. Banking co – formats of b/s and p&l prescribed by
BR Act /Co Act for companies (no p&l prescribed)
Basic Concepts Used in Preparation of Financial Statements
1. Entity Concept
2. Money Measurement Concept
3. Stable Monetary Unit Concept
4. Going Concern Concept
5. Cost Concept
6. Conservatism Concept
7. Dual Aspect Concept
8. Accounting Period Concept
9. Accrual Concept
10. Realization Concept
11. Matching Concept
Horizontal form of B/S
Liabilities Assets
Share capital Fixed assets
Res/surplus investments
Secured loans current assets
Unsec. loans loans & adv
Current liabilities misc exp./losses
Provisions
Vertical Form of B/S
Sources of Funds
1. Shareholder’s funds
(a) Share capital
(b) Res. & surplus
2. Loan funds
(a) Secured loans
(b) Unsecured loans
Application of Funds
1. Fixed assets
2. Investments
3. Current assets/loans & advances
less: current liabilities/provisions
Net current assets
4. Misc exp/losses
As per IT act, B/S FY is Apr-Mar. But Co’s act does not prescribe. But max 15 months
duration, 18 months with permission of ROC.
Profit & Loss Account
1. Gross and Net sales
2. Cost of goods sold
3. Gross profit
4. Operating expenses
5. Operating profit
6. Non-operating surplus/deficit
7. Profit before interest and tax
8. Interest
9. Profit before tax
10. Tax
11. Profit after tax (Net Profit)
Analysis of financial statements
1. Asstt of fin position/performance
2. Projections of future performance
3. Warning signals
4. Credit requirement assessment
5. Exam fund flow
6. Cross checking
7. Fund flow analysis : diversionidle funds
8. Trend analysis : trends/op.efficiency
9. Ratio analysis : profitability, liquidity, capital structure(der), ability to service debt/int,
inventory/debtor turnover
Bankers mostly use three methods for analysis of financial statements.
(a) Funds Flow Analysis
(b) Trend Analysis
(c) Ratio Analysis
While different users of financial statements are interested in different ratios, the ratios which
interest a banker most, are the following:
(a) Profitability Ratios
(b) Liquidity Ratios
(c) Capital Structure Ratios
(d) Ratio Indicating Ability to Service Interest and Instalments
(e) Turnover Ratios
(1) Inventory Turnover Ratio
(2) Debtors’ Turnover Ratio
Unit 28 – Working Capital Finance
Working Capital
The amount of raw materials, work in progress, finished goods, and receivables is called the
working capital.
Working Capital Cycle
The normal operations of a business enterprise consist of purchase of raw materials, processing
and conversion of raw materials into finished goods, selling these goods on cash/ credit basis,
receive cash on sale or end of credit period and again purchase raw materials. This is called
working capital cycle.
Method of Assessment of Bank Finance
1. Deciding on the level of Turnover of the Enterprise
2. Assessment of Gross or Total Working Capital : This is the sum total of the assessment of
various components of the working capital.
(a) Inventory
(b) Receivables and Bills
(c) Other Current Assets
Sources for Meeting Working Capital Requirement:
(a) Own Sources (N W C)
(b) Suppliers’ Credit
(C) Other Current Liabilities like salaries payable, advances from customers, etc.
(d) Bank Finance
Calculation of Bank Finance
Though banks are now free to formulate their own policies, the methods of lending, mentioned
there, still find place in the calculations followed by the banks. The methods are;
(a) First Method of Lending: Under this, the enterprise was required to bring in at least 25 per
cent of the working capital gap (total current assets minus total current liabilities excluding bank
finance)
(b) Second Method of Lending: Under this, the enterprise was required to bring in at least 25 per
cent of the total current assets.
(b) Third Method of Lending: Under this, the enterprise was required to bring in 100 per cent of
those current assets which are considered 'core assets' and at least 25 per cent of the remaining
current assets.
Bills / Receivables Finance by the Banks
Receivables are part of the current assets of a business enterprise. These arise due to sales on
credit basis to the customers. The bank provides finance against these in a fashion similar to that
for inventory.
Another method of sales is through Bills of exchange drawn by the seller on the purchaser in the
following manner;
(a) If no credit is to be provided to the customer, a demand bill is drawn.
(b) If the credit is to be provided on the sales, a bill of exchange, called usance bill, mentioning
the period of payment, is drawn on the purchaser and is accepted by him The outstanding amount
is shown in the accounts as 'bills receivables'.
The terms used in bills finance are purchase, discount and negotiation. Normally, 'purchase' is
used in case of demand bills, 'discount' in case of usance bills and 'negotiation' in case of bills
which are drawn under letters of credit opened by the purchaser's bank.
Guidelines of RBI for Discounting / Rediscounting of Bills by Banks
(a) Banks may sanction working capital limits, as also bills limit, to borrowers after proper
appraisal of their credit needs and in accordance with the loan policy as approved by their Board
of Directors.
(b) Banks should open letters of credit (L Cs) and purchase / discount / negotiate bills under L Cs
only in respect of genuine commercial and trade transactions of their borrower constituents who
have been sanctioned regular credit facilities by the banks.
(c) If a beneficiary of the LC wants to discount the bills with the LC issuing bank itself, banks
may discount bills drawn by beneficiary only if the bank has sanctioned regular fund-based
credit facilities to the beneficiary.
(d) Bills purchased/discounted/negotiated under LC will be treated as an exposure on the LC
issuing bank and not on the borrower.
(e) While purchasing / discounting / negotiating bills under LCs or otherwise, banks should
establish genuineness of underlying transactions/documents.
(f) The practice of drawing bills of exchange claused 'without recourse' and issuing letters of
credit bearing the legend 'without recourse' should be discouraged because such notations
deprive the negotiating bank of the right of recourse it has against the drawer under the NI Act.
(g) Accommodation bills should not be purchased/discounted/negotiated by banks.
(h) Banks should be circumspect while discounting bills drawn by front finance companies set up
by large industrial groups on other group companies.
(i) Bills rediscounts should be restricted to usance bills held by other banks.
(j) Banks may exercise their commercial judgment in discounting of bills of the services sector.
Non-Fund-Based Working Capital Limits
1. Guarantees
2. Co-acceptance of Bills
3. Letters of Credit
Commercial Paper (CP)
1. Unsecured money market instrument
2. Issued in the form of a promissory note
3. Introduced in India in
4. Cost of borrowing through CP is normally lower compared to other sources of short term
finances
Factoring
1. Method of financing the receivables of a business enterprise.
2. The financier is called 'Factor' and can be a financial institution.
3. Banks are not permitted to do this business themselves but they can promote subsidiaries
to do this. Under factoring, the factor not only purchases the book debts/receivables of
the client, but may also control the credit given to the buyers and administer the sales
ledger.
4. The purchase of book debts/receivables can be with recourse or without recourse to the
client.
5. If without recourse, the client is not liable to pay to the factor in case of failure of the
buyer to pay.
Forfaiting
1. This is similar to factoring but is used only in case of exports and where the sale is
supported by bills of exchange/promissory notes.
2. The financier discounts the bills and collects the amount of the bill from the buyer on due
dates. Forfaiting is always without recourse to the client. Therefore, the exporter does not
carry the risk of default by the buyer.
3. Unit – 29 Term Loans
4. 1. Banks provide term loans normally for acquiring the fixed assets like land, building,
plant and machinery, infrastructure etc., (personal loans, consumption loans, educational
loans etc. being exceptions)
5. 2. In exceptional cases, banks provide term loans for current assets This is called
Working Capital Term Loan (WCTL)
6. 3. Working capital loans are normally sanctioned for one year but are payable on
demand. Term loans are payable as per the agreed repayment schedule, which is
stipulated in the terms of the sanction.
Therefore, for the purpose of matching assets and liabilities of the bank, term loans are
considered long term assets while working capital loans are considered as short term
assets.
7. 4. As a term loan is expected to be repaid out of the future cash flows of the borrower, the
D S C R assumes great importance while considering term loans, while for working
capital loans, the liquidity ratios assume greater importance.
8. 5. There is no uniform repayment schedule for all term loans. Each term loan has its own
peculiar repayment schedule depending upon the cash surplus of the borrower.
9.
Deferred Payment Guarantees ( DPGs)
10. When the purchaser of a fixed asset does not pay to the supplier immediately, but pays
according to an agreed repayment schedule, and the bank guarantees this repayment, the
guarantee is called DPG. This is a Non-fund based method for financing purchase of
fixed assets.
11.
Project appraisal
12. Project appraisal can be broadly taken in the following steps:
13. (1) Appraisal of Managerial Aspects
(2) Technical Appraisal
(3) Economic Appraisal
14.
Types of Financing of infrastructure projects by Banks
15. (a) Take-out Financing
(b) Inter-institutional
(c) Financing Promoter’s Equity
16.
Appraisal
17. For fixed assets, WCTL, longer period, future cash flows
Deferred payment guarantees
Project appraisal : all fin requirements are considered, for term loan appraisal :
TEV/IRR/DSCR is taken into a/c
Appraisal of managerial aspects : credentials, financial stake, business module, form of
organisation
18.
Prudential Requirements
19. (1) Prudential Credit Exposure Limits
(2) Assignment of Risk Weight for Capital Adequacy Purposes
(3) Asset Liability Management
(4) Administrative arrangements
20.
Take-out Financing or Liquidity Support
21. (1) Take-out Financing or Liquidity Support
(2) Liquidity support from I D F C
Unit 30 – Credit Delivery
1. Documentation:
2. Proper stamping, dated, authority, with free will, duly filled in, roc charge, sub registrar,
CERSAI, third party guarantee
3. Charges : Mortgage, hyp, pledge, lien, assignment
4. Disbursement of w/c and term loan, promoter’s contribution
Consortium/Syndication
1. Two or more banks get into a formal arrangement
2. Exchange of information
3. Joint documentation/DP allocation
4. For syndication mandate to one bank is given for arranging entire loan
5. Unit 31 – Credit Control and Monitoring
6.
Credit control and monitoring, often referred as Loan Review Mechanism (L R M), plays
an important role in the following aspects:
7. (1) To ensure that the funds provided by the bank are put to the intended use and continue
to be used properly.
(2) To ascertain that the business continues to run on the projected lines.
(3) If the deterioration of the business continues despite appropriate action, the bank
should decide if any harsh action like, recalling the advance or seizing the security, etc. is
necessary.
8.
Credit Monitoring
9. Ensure end use, performance, warning signals and action to be taken
10.
Available Tools for Credit Monitoring / L R M
11. (1) Conduct of the Accounts with the Bank
(2) Periodic Information Submitted as per the Terms of the Advance
(3) Audit of Stocks and Receivables Conducted by the Bank
(4) Financial Statements of the Business, Auditors’ Report
(5) Periodic Visits and Inspection
(6) Interaction
(7) Periodic Scrutiny
(8) Market Reports about the, Borrower and the Business Segment
(9) Appointing Bank’s Nominee on Company’s Board
(10) Credit Audit
Unit 32 – Risk Management and Credit Rating
Credit Risk Monitoring
1. Operational risk : frauds/disruption of business due to natural calamities
2. Market risk : adverse market movement of interest rates, exchange rates
3. Credit risk : unwilling /inability to repay
4. External factors : exchange/intt rate changes, govt policies, political risks
5. Internal factors : overexposure to sector, low quality appraisal, monitoring,
6. Lack of efficient recovery machinery
Risk mitigation
1. Macro level : review/fixing internal limits for commitments, loan/compr/ rehab policies
2. Micro level : appraisal standards, sanctioning powers, credit ratings, scores,
3. Credit rating : risk measured : decision to lend, pricing, portfolio evaluation
4. Credit rating : management, securities available, financial aspects, business/project risks
5. Credit default : inability/unwillingness to meet commitments of repayment of interest
/principal, BG/LC, trading settlements
6. NPAs : Sub-standard, Doubtful, Loss
Wilful Default
1. Default even though the borrower has capacity to repay
2. Diversion of funds / siphoning of funds
3. Disposal of securities
4. Options available for stressed assets:
5. Exit, rescheduling/restructuring, rehabilitation, compromise, legal action, write off
CDR Mechanism
1. CDR Mechanism: for consortium/multiple banking, outstanding more than Rs.10 cr
2. CDR standing forum: formulates policy
3. CDR core group carved out of forum to assist standing forum in decisions relating to
policy
4. CDR empowered group decides the cases
………………………………………………………………………………………………………………………………