ISSN No. 0975-7708 SAMIKSHA 3 no 1 2012.pdf · The Research Journal of United Institute of...

The Research Journal of United Institute of Management, Allahabad, U.P., India

Volume III No. 1 January - June 2012

SAMIKSHA

United Institute of ManagementAllahabad

ISSN No. 0975-7708

Bi – Annual Journal

A Study on Marketing Innovations at Bottom of Economic PyramidDr. Shubham Goswami

An Empirical study On Employees Satisfaction At Work Place in BPO Companies of OdishaDr. Sunil Kumar Pradhan & Suman Kalyan Chaudhury

A study of derivatives trading in India: Apropos to the recessionary forcesDr. Niti Saxena

Impact of work culture on performance-A life study at Ester Industries LimitedMr. Rajnish Ratna, Ms. Sarbjot Kaur, Ms. Neeraj Kumari

An Empirical Study on People’s Perception of Benefit of Cause Related Marketing to Commercial and non Commercial OrganizationsDr. P.K. Agarwal, Dr. Mani Kansal, Mr. A.K. Tyagi

A Study on the Credit Risk Management Framework at Banks in Coimbatore RegionP. Varadharajan

Aligning HR with Business GoalsMr. Abdul Qadir

A Study on selection criteria of Bank credit card with special reference to Kanpur CityMr. Yogesh Puri

Performance of Foreign Banks In India: An AssesmentDr. Durgam Madhab Mahapatra

Banks ownership structure & their performance: A case studyDr. Bhaskar Goswami

EDITORIAL BOARD

Printed and Published by Dr. Jagdish Gulati on behalf of the United Institute of Management, UPSIDC Industrial Area, Naini, Allahabad (U.P.) India. Printed by Shantanu Publishers, Mumfordganj, Allahabad, 211002.

Email- [email protected], [email protected]

Editor: Prof. T.B. Singh

Volume III, No. 1, January - June 2012United Institute of Management, Allahabad

Copyright © UIM, Allahabad

SAMIKSHA

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EDITOR-IN-CHIEFProf. T.B. Singh

PrincipalUIM, Allahabad

Bi – Annual Journal

CHIEF PATRONMr. Girdhar Gopal Gulati

ChairmanUnited Group of Institutions

PATRONDr. Jagdish Gulati

PresidentUnited Group of Institutions

EDITORIAL REVIEW BOARD

Mr. Gaurav GulatiVice-President, UGI Allahabad

Mr. Vikas MehrotraAsst. Prof. (HR & Supply Chain Mgmt.)

Dr. Rahul RajanAsst. Prof (Accounting & Finance)

Dr. Vishnu Prakash MishraAsst. Prof (Marketing & I.T.)

Mr. Amitabh SrivastavaAsst. Prof (Operation Research)

Mr. Prakash KundnaniLecturer (Accounting & Finance)

Ms. Sarika YadavLecturer (Strategic Management)

Mr. Rohit Kumar VishwakarmaLecturer (Marketing)

ADVISORY BOARD

Prof. S.K. SinghHead & Dean, FMS, BHU

Prof. A.K. TripathiProfessor, Computer ScienceInstitute of Technology, BHU

Prof. K.M. SharmaFormer Director, MONIRBA,University of Allahabad

Prof. A.S. SahayChairman - NMP, MDI, Gurgaon

Mr. M.P. GargExecutive DirectorRecron Synthetic Ltd., Allahabad

Prof. B.N. Asthana Former Vice ChancellorKanpur University

Mr. Naresh AgrawalChairman, Sunstar Overseas Ltd.

Mr. A.K. JainChairman & Managing DirectorBPCl, Naini, Allahabad

SAMIKSHAJournal of UIM, Allahabad

From the Editorial Board

he intensification of world competition witnessed in recent years has

brought to the fore pivotal importance of adopting innovative strategies to Twin over the markets. Today’s fast changing business scenario marked by

the proliferation of products and services, emergence of discerning and

sophisticated consumers and greater impact of technology have thrown up

daunting challenges for managers. So we are privileged to present before you the

new issue of ‘SAMIKSHA’ which contains a rich blend of research and case papers.

The Journal focuses attention on new ideas, creativity, innovation, and experience

by academicians and professionals in multidimensional streams of management

and information technology.

The Editorial Board is committed to re-establish a landslide say of the Indian Ethos

within the managerial discipline worldwide. We further seek a similar patronage of

the Advisory Board in actualizing the goals set before ‘SAMIKSHA’.

I would like to express my indebtedness to all the contributors to the present issue of

‘SAMIKSHA’ and hope they will continue their relationship with us. I am also

grateful to the eminent reviewing panel for selecting such quality papers for

inclusion in the Journal.

Our special thanks to the Patron who has been an encouraging source and

strength.

We shall be highly obliged if the readers send us their valuable

suggestions, observations, and comments to improve our future

endeavors.

Prof. T.B. Singh

Editor-in-Chief

A Study on Marketing Innovations at Bottom of Economic Pyramid 01Dr. Shubham Goswami

An Empirical study On Employees Satisfaction At Work Place in BPO Companies of Odisha 07Dr. Sunil Kumar Pradhan & Suman Kalyan Chaudhury

A study of derivatives trading in India: Apropos to the recessionary forces 13Dr. Niti Saxena

Impact of work culture on performance-A life study at Ester Industries Limited 20Mr. Rajnish Ratna, Ms. Sarbjot Kaur, Ms. Neeraj Kumari

An Empirical Study on People’s Perception of Benefit of Cause RelatedMarketing to Commercial and non Commercial Organizations 32Dr. P.K. Agarwal, Dr. Mani Kansal, Mr. A.K. Tyagi

A Study on the Credit Risk Management Framework at Banks in Coimbatore Region 37P. Varadharajan

Aligning HR with Business Goals 56Mr. Abdul Qadir

A Study on selection criteria of Bank credit card withspecial reference to Kanpur City 59Mr. Yogesh Puri

Performance of Foreign Banks In India: An Assesment 67Dr. Durgam Madhab Mahapatra

Banks ownership structure & their performance: A case study 73Dr. Bhaskar Goswami

Volume III, No. 1, January - June 2012

SAMIKSHA

Contents

*Assistant Professor-School of Management, Sir Padampat Singhania University, Udaipur (Rajasthan.)

INTRODUCTION

Almost two-third of the world population which earns

less than US$ 2 per day composes of the bottom of the pyramid

(BOP) (CK Prahalad, 2005). But this part of pyramid is able to

generate only 5% of total wealth of the whole world (Human

Development Report, 2006). The aggregate purchasing power

of 9 developing countries where most of the BOP market exists

(3 billion people, representing 70% of the developing world

population): China, India, Brazil, Mexico, Russia, Indonesia,

Turkey, South Africa, and Thailand-in terms of Purchasing

Power Parity, they represent a GDP of $12.5 trillion (Irma Shyle

and Jonida Teta, 2012). This is the market which can’t be

ignored. In view of global BOP market, Asia makes the biggest

chunk of global market, followed by Latin America, Eastern

Europe and Africa. Sector-wise, food is the biggest BOP

market, followed by energy, housing, transportation, health,

ICT and water. (Economic Times, 2007)

For the fast growing economies like India and China, this

segment is evident of many success stories. For marketer, here

lies a great opportunity and indication that there is something

definitely happening at this grass root level. Besides of

proactive marketing effort and growth opportunities,

companies moved down to the pyramid also due to the

competitive pressure. Jaiswal (2008) argued the HUL

(Hindustan Unilever Limited), an Indian subsidiary, move of

launching iodised salt brand ‘Annapurna’ and small sachet

shampoo for brand like Lux, Sunsilk, Clinic plus in rural Indian

market is not proactive but it was the result of competitve

pressure from first movers like Tata salt and CalvinKare

respectively.

Before looking into details, it is important to estimate the

size of BOP, Prahalad and Hart (2002) estimate the size to be 4

billion in 4th tier of economic pyramid (figure 1). This number

includes developing and least developing countries (LDC). But

there are many factors that limit the participation of private

sector in development of LDC which include inefficient

regulation, widespread corruption, insufficient basic

infrastructure, poverty and underdeveloped financial

structure; it makes the real number of prospective customer

About four billion low income people makes world’s

bottom of economic pyramid. The large base of Bottom of

Pyramid (BOP) provides growth opportunities for companies

of all size and a forum of innovation. Innovations in

technology, products and services, procurement and

distribution, marketing and business model will be needed to

serve BOP consumers. Paper analyze Indian BOP market

which can help businesses to think more creatively about new

products and services that meet BOP needs and about

innovation opportunities to develop market-based solutions to

achieve them. The growth of BOP market is only possible when

companies initiate their efforts not just as CSR act but to get

business benefit by serving the poor. The successful business

model exists when rural people participate in business.

Keywords: marketing strategies, innovations, Bottom of

Pyramid

A Study on Marketing Innovations atBottom of Economic Pyramid Dr. Shubham Goswami*

relatively less. So these low earners (less than $1 per day) are

not likely to be profitable customer for Multi National

Companies (MNCs). Therefore the people at extreme base of

pyramid are not target customers for MNCs marketing

initiatives (Jaiswal, 2008).

Indian BOP comprises about 700 million customers which

present a great opportunity for small to large national and

multinational corporations. With Internet and Communication

Technology (ICT) revolution and public-private sector

interventions, today Indian Rural consumer is not only

becoming literate but also much aware about various products

and services offered in a marketplace. Hence BOP market is

emerging as a large market for number of products and

services including telecom and financial services (see Table 1 of

Appendix). Today the BOP market is as competitive and

emerging as large urban markets.

Some unique characteristics of Indian BOP market are

listed below:

• Income levels of rural BOP seasonal as well as low in both

per capita and disposable income.

• Less access and involvement of financial institutions to

lower down the economic risks felt by rural consumer.

• Languages and culture varies across regions and low

literacy levels slow down the creation of standard, cost-

effective marketing communication.

• Rural consumers are not very flexible in their choices of

product and require high degree of product

customization.

• Absence of basic infrastructure in rural markets like

transportation and telecommunication has created

barriers to entry for affordable, mainstream products

• Scattered and bare population density in interior of India

has prohibited commercial players from enjoying

economies of scale.

Companies attempt to exploit opportunity in BOP

markets by emphasizing in product and process innovations.

The quest for innovation in distribution channels is also

contemporary issue in the market. A significant enabler of

strategic innovation in recent years is the emergence of

information and communication technologies that reduced the

transaction costs and accelerated the exploitation of innovation

at the industry level (Markides, 1997). Due to increased access

to information for customers and intense competition,

companies are using innovation as major source of competitive

advantage at BOP (Prahalad and Hammond, 2002). The thrust

of this paper is to study strategic innovations in marketing

efforts from a variety of industries in developing markets, to

try to understand the reasons behind their success or failure.

LITERATURE REVIEW

Indian BOP Market

There has been no uniform measure of poverty in India.

World Bank in 2005 estimates 41.6% of the total Indian

population falls below the international poverty line of US$

1.25 a day. In 2010, United Nations Development Programme

(UNDP) estimated that 37.2% of Indians live below the

country's national poverty line. According to report of Centre

for Development Finance (2011), Institute for Financial and

Management Research (CDF-IFMR), Indian BOP market is

defined as households in the bottom four expenditure quintiles

(based on data from the National Sample Survey Organization,

India, 2004/2005) that spend less than Rs. 3,453 (US$75) on

goods and services per month. This definition represents a

market of 114 million households, or 76 percent of the total

rural population. Report in 2011 from UN Millennium

Development Goals (MDG) states that 320 million people in

India and China are expected to come out of extreme poverty in

the next four years, while India's poverty rate is projected to

drop to 22% in 2015 (Time of India, 2011), as India is on track on

achieving targets on poverty reduction. In recent years, India

has enjoyed consistently high rates of growth and even as the

world’s largest democracy, country faces of the global

economic crisis confidently.

With a large population segment, India’s rural Bottom of

the Pyramid (BOP) market presents a significant opportunity

not only for multinational corporations but also for small and

medium manufacturers and producers. In parallel with rapid

economic growth, Indian rural consumption has grown

remarkably also the dynamics of this rural consumption is

expected to change drastically. The average rural Indian

household spends about 75% of its annual income on food,

beverages and tobacco and remaining on energy needs,

housing and health.

Innovation for BOP market

Previous literature classifies the innovation and

innovativeness into three categories (Pearson, 1990; Midgley

and Dowling, 1978). Firm Innovativeness, or firm’s ability to

develop new products at a fast rate; Product Innovativeness,

degree of newness in new product and Usage Innovativeness,

that is using the product in different ways or knowing all

different usage of products. It has been observed that all types

of innovations and innovativeness are not only present but also

relevant for the BOP market to success.

Rural market is the most suitable venture for innovations.

Companies find these markets as tough as urban markets in

sense of scale, scope and sustainability. Therefore large

companies, having huge disposable income for Research &

Development, are considered to be best suited players for

experimenting and sustaining marketing efforts in this market,

but there are other major drivers in the market which makes it

attractive as well as profitable for all (Table 2).

02 SAMIKSHA - Volume III, No. 1, January-June 2012

information distribution model provides real-time market

information and customized farming knowledge to enhance

farmers ability to take decisions and align their farm output

with market demand and secure quality & productivity. Indian

company n-Logue connects franchised village computer

kiosks with centralized nodes with internet facility. Each

franchise serves 30,000 and 50,000 customers, providing

phone, e-mail, internet services and relevant local information

at affordable prices. CavinKare comes with a highly successful

concept of ‘sachets’ which revolutionize the packaging concept

for personal skin and healthcare segments. CavinKare is not

only successful into the rural as well as urban households.

Later on, this concept has been adopted by HUL and many

other FMCG companies. Companies like HUL, ITC, Nirma,

Dabur, Godrej, Colgate, Asian Paints, Philips, Coca-cola, Pepsi,

LG, Samgsung, Maruti, Airtel, Idea cellular, and many others

have success stories by using innovative strategies. But the

major challenge for companies is not to develop new product

for BOP but rather to adopt or offer product that might be

created in developed nation.

People at BOP not only pay attention of objective but also

on subjective benefits of product or service. Therefore

innovation should provide both tangible and intangible

benefits to customers at BOP. The modified dimension of 4P’s

of marketing at BOP is given in Table 2

Srinivasan (2005) in his theory of ‘Inclusive Capitalism’

identified different forms of innovation adopted from C K

Prahalad views. According to him innovation at BOP can be

achieved by hybridization of technology to sustain in harsh

environment; development of eco-friendly solutions;

innovation in processes to reduce cost; by making creative

interfaces to enable access to information; developing new

distribution model for low-cost products; and willingness of

major economic contributor to contribute in new BOP

paradigm.

In view of Prahalad and Hammond (2002), Businesses can

gain three important advantages by serving the poor. These

are: (a) generating new source of revenue growth; (b) achieve

greater efficiency in communication to customers at BOP in

innovative ways; (c) access to innovation. But innovation at

BOP can only be sustainable if it is accessible, affordable and

scalable. All innovations must result into some product or

service.

MARKETING AT BOP

In past years, several authors from different disciplines

investigate the design and development of products and

services for the BOP (Prahalad, 2005; Whitney & Kelkar, 2004;

Kandachar & Halme, 2008; Eaton et al., 2009; Viswanathan et

al., 2009).

Innovation and 4P’s for BOP

Some famous innovative initiatives at BOP market include

HUL Project Shakti which aimed at empowering the rural

women to become entrepreneur by providing opportunity to

promote and distribute HUL products and improve her living

standards. They also run campaign of health and hygiene

awareness. Amul 3-tier co-operative model eliminate

irrationalities of the traditional middlemen in processing and

marketing of milk produce and provide farmers with justified

profits. Indian Tobacco Company (ITC) social responsibility

initiative called ‘e-choupal’ through its internet kiosk-based

A Study on Marketing Innovations at Bottom of Economic Pyramid 03

Table 2: 4P’s at BOP

Table 1

Major Drivers for

innovations

Implications

Increased access Increase in awareness for

range of products and

services.

Demising role of

government and

international aid

More favorable environment

for MNCs with more support

from NGOs

Intense competition in

other Tiers (in other

social strata)

Huge untapped market at

BOP and companies try to

move down to pyramid from

greater profit generation

Discourage migration Companies creating product

or services for rural needs

and also enhance

employment opportunities.

Source : adopted from Prahalad and Hart, 2002

Product • Should fulfill personal and business

needs (agriculture)

• In small units, reusable packs

• In accordance with habits and

convenience of rural consumers

• Set awareness for methods like rain

water harvesting, waste management,

credit facility for agriculture goods

Price • Price should be attractive and

affordable

• Micro credit facilities should be

available

Promotion • In addition to traditional methods,

adopt new ways of communication like

road shows, organizing trade fair,

community radio

• Kiosk marketing

• Marketing through opinion leaders like

sarpanch, doctors, postman, school

teachers and others

Place • Adopt hub-spoke model for distribution

• Display at haats, mandis and local fare

• Hire local community people to

promote and distribute, which in turn

enhance employment.

Innovation and 4As for BOP

Affordable:

It relates to the degree to which a firm’s goods or services

are affordable to BOP consumers. It is a major challenge for the

strategic innovators to develop products that match the cash-

flows of customers. As the segment suffers from seasonal and

low income, many companies like Honda adopt the

installment payment method for selling their power generators

to shopkeepers. Tata motors launch of Nano also target to

make car affordable to large market segment. Companies like

HUL, CalvinKare, Godreg adopts sachet-strategy to penetrate

into the market. It offers consumer products in small units as

well in low unit price. One another view on sachet strategy is

that they ease for companies to penetrate into rural market but

it also decreases the overall consumption (Economic Times

2004). So to make small packets affordable, companies must

kept the unit price low, which is economically very difficult

task as companies provide discount for only large volume

packages.

Major national banking and financing institutions should

provide micro-finance to BOP consumers. This will solve the

problem of initial capital requirement for agriculture and

enhance its purchasing power to invest more money in other

value creation activities. For the banks also this increases

awareness among customer about banking and financing

services and help them to develop partnerships with them.

Acceptable

It is an extent to which consumers are willing to consume,

distribute or sell a product or service. Due to cultural, societal,

political and religious differences, BOP market give challenge

for companies to offer or adopt product developed for urban

consumers to them. Successful innovators offer products

designed for unique needs of consumers as well distributors.

Lifeboy and Breeze 2-in-1 are such brands that are marketed as

all purpose soap used for bathing. Mobile manufactures like

Nokia, Samsung not only offer low cost mobile devices but also

with tools (Nokia Life Tools) to get local information like

market prices and wheather updates. Telecomm operators also

offer low value recharges to cater this large unconnected base.

As suggested by Jaiswal (2008), there is a requirement of

balance in inclusion and exclusion of products from the market

which means that companies must avoid inclusion of non-

essential products and exclusion of essential products for rural

consumers those are likely to enhance their wellbeing.

Availability

It is an extent to which customers are able to readily attain

and use product or service. It is also a significant challenge to

ensure the availability of products and services in a fragmented

or non-existent distribution channels in BOP markets.

Companies today are adopting unique mix of distribution

strategies, exploiting the strengths of local players and creating

hybrid value chains to reach end users.

Strategic innovators are inventing methods of distributing

or delivering their products and services to even the most

isolated BOP communities. ITC uses its e-choupal network to

distribute its agri and FMCG through Choupal Sagar (retail

outlet). HUL uses ‘Shakti Ammas’ of Project Shakti as their

product distributors and promoters. Eveready uses extensive

distribution network of 1,000 vans, more than 4,000

distributors and 44 warehouses to reach the last mile in remote

Areas. Some of the more common distribution partners for new

companies in rural markets are Micro Finance Institutions

(MFIs)/Non Government Organisations (NGOs)/Self Help

Group (SHGs)/ Public Distribution System (PDS). PDS

however does not encourage the participation of private

players. Apart from partnership with private and social

groups, companies also need support from government

agencies to make access to their information and services using

e-government portals.

Awareness

It is related to the degree to which customers are

knowledgeable about product or services offered. Building

awareness can be a major challenge as large customer base in

rural market are inaccessible to conventional advertising

media. Companies have to innovate in their communication

choices and methods. Messages can be sent through mass

media (community radio, TV, hording, wall painting,

newspaper, cinema), local media (melas, folk media, animal

parade, haats, mobile vans) and personalized media (dealers,

sales person).

Today an Integrated marketing communication (IMC)

approach is important in rural markets as it achieve two

benefits (a) creating awareness and (b) motivating customers to

buy products or services. Companies use social marketing as

key ingredient in their product marketing. Lifeboy-Swasthya

Chetna, Dettol-Swine Flu campaign, Novartis-Arogya Parivar,

Hindustan Latex Limited-Swasthya Gram Pariyojana,

Reliance Industries-HIV awareness programme, Aravind Eye

Hospital-Cataract prevention and operation camps, Narayan

Hrudayalaya Hospital-cardiac surgery and health awareness

camps are examples of such innovative marketing approaches.

These initiatives not only spread awareness, empower the

society but also establish trust on the brand. Some companies

use process innovations like developmental marketing, which

include taking up marketing programmes keeping the

development aspect in mind. It aims is to develop the rural

people by social entrepreneurship.

The success of large companies working in BOP market

can only be achieved by contribution of other important factors

in the environment. These factors involve access to low-cost

advertising media and technology, low wage worker in rural

sectors, social service organization, Individual sponsors,

donors, local business units, government subsidies.

CONCLUSION

While reviewing other aspects of BOP market, one must

never forgot the basic element of success that is education. It

was empirically evident that without proper education in the

society, no country can economically progress. Better

performance and economic growth can only be possible by

investment in human capital, especially education. Education

can lead to better awareness about health care and lifestyle


which in turn increases the people productivity to contribute to

country growth.

Karnani (2007) emphasis on the point of considering poor

not just as consumer but also as producer, which means that we

have to facilitate the production environment by the poor.

Companies can adopt the decentralized production model as

adopted by AMUL and Shri Mahila Griha Udyag Lijjat Papad,

all these organization were successfully working in BOP sector

for more than 50 years (Jaiswal, 2008). This production

environment should also support for selective consumption.

Selection consumption means to empower the customer to

choose between the essential and non-essential good.

It is worth considering the complex ways that the

marketing activities of large corporations can affect the quality

of life for the BOP population. Companies often in their

marketing activates promote products which may aspire to

buy a product well apart from their basic needs and misplace

their priorities for essential products (Sarin and Venugopal,

2003). As an example ITC uses its distribution channel of e-

choupal to sell cigarettes in Choupal Sagar. Companies should

offer product which are important for their wellbeing like

health care, medicines, fertilizers, pesticides, agriculture

equipments, micro-finance facilities. Companies marketing

communication should also be educative and informative for

the customer, to enable him to choose between essential and

non-essential. All these activities not only increase their income

but also increase their saving, and thus create more disposable

income.

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A Study on Marketing Innovations at Bottom of Economic Pyramid

06

Appendix

Figure 1: The World Economic Pyramid, Source: Prahalad (2005)

SAMIKSHA - Volume III, No. 1, January-June 2012

Table 1: Size of Indian Rural Market (annual)

Source: Francis Kanoi Marketing Services, 2009

FMCGs 650 billion

Consumer Durables 50 billion

Agri-Inputs 450 billion

2/4 wheelers 80 billion

Total 1230 billion

Figure2: HUL Project Shakti: women dealers, or ‘Shakti Ammas. Source: www.martrural.com

Figure3: Shri Mahila Griha Udyog: papad making, Source: www.lijjat.com

Figure 4: AMUL: milk collection center, Source: http://agrariancrisis.in

*Lecturer, Dept. of Business Administration, Berhampur University, State University, Govt. of Odisha, India. E-mail id: [email protected]

**Placement Officer, Dept. of Business Administration, Berhampur University, State University, Govt. of Odisha, India. E-mail id: [email protected]

INTRODUCTION

The level of compensation is one of the more important job

attributes to individuals (Jurgensen, 1978). Not surprisingly,

salary or wages as measures of pay level consistently have been

shown to predict pay satisfaction among a number of different

occupational groups (Berger & Schwab, 1980; Dreher, 1980;

Dreher et al., 1988; Futrell, 1978; Hemmasi, Graf, & Lust, 1992;

Lawler, 1971; Motowidlo, 1982; Ronan & Qrgant, 1973; Schwab

& Wallace, 1974). Moreover, for almost all motivational

theorists salary or compensation is a strong motivator. For

example, as per Herzberg’s (1968) two factor theory, salary is a

hygiene factor as well as motivator.

In fact, the study of employee satisfaction with pay has

been a longstanding interest to psychologists. Way back in

1935 Hoppock’s seminal work on job satisfaction revealed that

dissatisfaction with wages was the most important reason for

voluntary separation across a broad range of occupations.

Other consequences of wage related dissatisfaction has been

studied in subsequent times. Those include reduced level of

performance (Bretz & Thomas, 1992); coming late to the office

(Koslowsky, Sagie, Hrausz & Singer, 1997); absenteeism

(Weiner, 1980); theft (Greenberg, 1993); turnover and turnover

intentions (Motowidlow, 1983). Even there are studies that

tried to relate pay satisfaction with outcomes in the

organizational level analysis (Griffin, Mathieu, and Jacobs,

2001; Schneider, Hanges, Smith, & Salvaggio, 2003). While

Griffin et al. studied the effect of pay satisfaction on the

teachers’ perception of local community support for education,

Schneider et al. tried to find out the relationship between pay

satisfaction and organisations’ actual financial performance. A

relatively recent finding reveals that pay satisfaction is related

to student academic performance, teacher intention to quit,

and student dropout level (Currall, Towler, Judge, & Kohn,

2005).

Employees’ perception of equity and procedural justice in

pay fixation is considerably related to pay satisfaction. This has

been supported by both theoretical and empirical evidences

(Heneman & Judge, 2000; Greenberg & Weithoff, 2001). Studies

suggest that individuals who historically have received higher

Indian BPOs have been in news for certain contradictory

issues. While this industry is able to create more employment,

on the other hand is also facing the problem of attrition.

Although these issues have been addressed from different

perspective, more and more researches are required to

understand the employment trends and employee expectation

and satisfaction, may be in the local level. An online survey

was conducted at Orissa to address compensation issue in

different BPOs. 106 respondents selected on the basis of

snowball sampling fully completed the survey. With the help of

descriptive statistics and correlation tests findings were

generated. Overall it was found out that BPOs are no more

considered as stepping stones to other jobs rather are thought of

as long term career prospects. And the compensation

satisfaction was highly correlated to job satisfaction among the

respondents.

Keywords: Compensation, Job satisfaction, BPOs,

Orissa, India

An Empirical Study on Employees Satisfactionat Workplace in BPO companies of Odisha Dr. Sunil Kumar Pradhan*

Dr. Suman Kalyan Chaudhury**

raises in the past should be more satisfied with their raises

(Dyer & Theriault, 1976). And people report more satisfaction

to pay raises when it is related to performance (Folger &

Konovsky 1989) and that to follows fair criteria (Dyer &

Theriault 1976)

In a recent study (Carraher, 2011) it has been found out

that attitudes towards benefits were significant predictors of

turnover for employees and entrepreneurs over a four-year

time period while satisfaction with pay was typically

significant for employees but not for entrepreneurs. It was also

found that for the employees both equity and expectancy

considerations were able to explain differences in turnover

rates while for entrepreneurs expectancy theory

considerations were more powerful than equity theory

explanations. Previous research has identified several

background factors that influence employees’ satisfaction with

compensation such as age (Dreher, Ash & Bretz, 1988),

educational level (Klein & Maher, 1966), gender (Nash &

Carroll 1975) & tenure (Dreher 1981). Similarly, one Indian

study reveals that people from private and public sector differ

in their pay satisfaction which acts as a catalyst for job

satisfaction (Sharma & Bajpai, 2011). Although it is not denied

that pay satisfaction has multiple correlates (Hemmasi, Graf &

Lust 1992), some studies find no relationship between

compensation and job satisfaction (Igalens & Roussel 2000).

Overview of BPO industry

Business Process Outsourcing (BPO) is one of the fastest

growing segments of the Information Technology Enabled

Services (ITES) industry. A major success of the BPOs can be

attributed to its ability to attract the youth of India. The

changing lifestyles, demand for luxury and emergence of high-

income spending groups coupled with a thoroughly

cosmopolitan outlook of life are the factors along with the

glamour attached with the BPO jobs generated passion in

Indian youth for BPO jobs (Purwar, 2010).

India has become the leading destination for such

companies with 46 percent of the global business-process-off

shoring (BPO) market (Kaka, Kekre & Sarangan, 2006) and will

probably remain so for sometime as it is predicted from its

growth. The driving forces that account for this growth of BPO

in India are emphasis on quality service, skilled sets and

workers, cost effectiveness, English speaking manpower,

enabling business policy and regulatory environment, rapid

growth in key business infrastructure etc. (NASSCOM-

McKinsey, 2002).

In present scenario, the Indian BPO employees represent a

new middle class-with its employment base in the increasingly

globalized private sector. The new middle class identifies with

an image of a professional that the BPO work provides them

(Sandhu, 2006). In terms of the moral fiber of BPO employees,

this particular group, above all, exemplifies an interesting and

important part of the so-called knowledge workforce holding a

significant covert influence through their proximity to and

involvement with electronic means of production and

accumulation (Batstone, Boraston, & Frenkel, 1978).

BPOs have been found to be creating highest number of

employment in India. According to the sixth quarterly survey

by the Ministry of Labour and Employment the IT/BPO sector

has shown the highest increase at 6.9 lakh during 2009-10. Also,

the wages for the IT/BPO sector showed the maximum growth

of 9.3 percent during the last quarter (Siliconindia 2010). With

all these achievements and characteristics BPOs could draw

the attention of researchers and media equally.

While there was publicity regarding its popularity among

the Indian middleclass job seekers, on the other hand lots of

reporting were there regarding its attrition problems and job

induced stress with its consequences. While unraveling the

causes of attrition, HayGroup in its 2008 "BPO Sector Special

Survey," came to the following findings. a) the salary structure

is not competitive in BPO firms as compared to the rest of the

Indian market; b) the short-term variable component was just

4% last year while the rest of India's workers enjoyed 10%. Such

a low figure does not give any scope in creating incentive

programs to encourage employees to work harder or stay at the

organization; c) the attrition rate at BPOs last year was 23.5%

compared to 15% in the general market; d) the benefits package

mainly focused on retirement benefits, which clearly does not

mean much of an incentive for a 20 year old. The employee gets

the money at age 60. So retirement benefits like PF do not

encourage employees to stay at one company (BPOWATCH,

2010).

In the same line the present study tries to find out the

satisfaction level of BPO employees related to their

compensation package and other benefits. It tries to answer the

basic questions like- a) what is the satisfaction level of

employees of the different components of compensation; b) Do

people differ in perception of compensation satisfaction with

regards to their demography?; c) what is their job satisfaction

level with respect to different employee benefit schemes?

METHOD

Sample

A snowball sampling method was adopted to select the

respondents. On the basis of personal contacts some

respondents were identified. Then they were requested to pass

on the URL of the online questionnaire to their acquaintances

working in BPO sector. However, the study was limited to the

BPO companies situated in and around Bhubaneswar city of

Orissa, India. In total 145 persons had responded to the

questionnaire from which 106 respondents had completed the

questionnaire fully.


master’s degree (PG Level) holders (48.1%). Most of the

respondents (36.8%) had 7-12 months experience in the present

company however it was also found out that maximum people

(27.4%) had 5-10 years experience in the BPO industry. None of

the respondents were getting salary less than 2 Lacs per annum

and maximum people (38.7%) had the salary 2-4 Lacs followed

by 34.0% of respondents having more than 6 Lacs per annum.

Instrument & Data collection

A survey instrument was prepared that contained

demographic information along with questions measuring the

level of satisfaction from different components, and

satisfaction on different employee benefit schemes. The items

contained the different financial benefits provided in different

organizations. Four experts having more than ten years

experience in corporate were consulted while preparing the

questionnaire. Perception regarding the salary components

was obtained through a 23 item questionnaire having different

components of salary and benefits as items. The responses

were collected in a five point Likert type of scale (1= least

important to 5= highly important). The scale had high

reliability score (alpha= 0.95). The job satisfaction employee

benefit scheme scale consisting of 25 items measured responses

in a five point scale ranging from 1= lowest, 2= somewhat, 3=

nutral, 4= good, 5= excellent (alpha = 0.94).

For data collection, the survey instrument was made

online and the link was distributed to contact persons with a

request to forward it to their known persons working in BPOs.

The responses were directly stored in the main computer of one

of the investigators. The stored data then was imported to SPSS

for further analysis. The responses which were complete in all

respects were retained and others were rejected.

RESULTS

The data were analyzed with the help of SPSS. Along with

the descriptive statistics, correlation tests were used to

generate the findings.

Out of them 69.8 % were male and 30.2 % were female and

the majority is within 20 to 30 age group. From the above table

it could be also noticed that the majority of the people are

An Empirical Study on Employees Satisfaction at Workplace in BPO companies of Odisha 09

Table 2: Satisfaction derived from different components of compensation (in percentage)

Table 1: Sample Profile

Variables Frequency Percentage

Age

=< 20 years 21-25 years 26-30 years 31-40 years >= 41 years

0 0

38 35.8

42 39.6

20 18.9

6 5.7

Sex

Male Female

32 69.8

74 30.2

Qualification

Under Graduate University Degree Masters Degree Ph. D. Other

9 8.5

39 36.8

51 48.1

3 2.8

4 3.8

Experience in current company

=< 6 months 7-12 months

1-2 years 2-5 years >=5 years

0 0

39 36.8

32 30.2

18 17.0

17 16.0

Total work experience

=< 6 months 7-12 months 1-2 years 2-5 years 5-10 years >=10 years

0 0

18 17.0

10 9.4

28 26.4

29 27.4

21 19.8

Current cost to the company

<= 2 Lacs 2-4 Lacs 4-6 Lacs >= 6 Lacs

0 0

41 38.7

29 27.4

36 34.0

Salary components Delighted Satisfied Neutral Not Satisfied

Completely dejected

Basic 16.0 16.0 39.6 16.0 12.3

HRA 17.0 13.2 39.6 19.8 10.4

Group Insurance 51.9 16.0 19.8 7.5 4.7

Bonuses 48.1 21.7 12.3 7.5 10.4

Medical Benefits 44.3 11.3 16.0 17.0 11.3

Abroad traveling opportunities

35.8 9.4 39.6 9.4 5.7

Paid time off 30.2 13.2 35.8 8.5 12.3

Higher education options 34.0 15.1 18.9 7.5 24.5

Gym and other recreational amenities

67.9 10.4 11.3 5.7 4.7

Pickup and drop 58.5 12.3 14.2 7.5 7.5

Training and upgrading skills

26.4 12.3 16.0 13.2 32.1

The table shows that the people are deriving the maximum

satisfaction from Night shift allowances (60.4%), Tour

allowances (63.2%), Family get together (61.3%), Gym and

other recreational amenities (67.9%) that means the people are

actually becoming more family and health oriented and

seeking night shift disturbance allowances due to the nature of

work in odd hours. Next level of priority they have given to the

factors e.g. Pickup and drop (58.5%), Retirement benefits

(59.4%) which shows the crowd is looking this sector from

more long term perspective and may be life long career where

they might find even the retirement benefits. This Indian

generation is habituated in seeing their earlier generation

enjoying retirement benefits being public servant. Group

Insurance (51.9%), Yearly paid vacation (51.9%) also motivates

people and they draw satisfaction in the next level priority that

shows this segment is getting much matured and looking for

more family orientation. The above said factors are more

important compared to Basic (16.0%), HRA (17%).

As it is reflected in the Table 4, respondents of different age

groups significantly differed in the perceived levels of

compensation satisfaction, however, their job satisfaction level

did not differ significantly. From the mean scores it is evident

that respondents in the range of 31-40 years were highly

satisfied with their compensation package in comparison to

others but it was not reflected in their job satisfaction level.

Youngsters in the age group 21-25 years found to be more

satisfied with the job. Such finding invites more insight into

this phenomenon.


Regular management feedback to improve mistakes

28.3 11.3 34.9 15.1 10.4

Cafeteria facilities 50.0 17.0 15.1 14.2 3.8

Yearly paid vacation 51.9 12.3 17.9 8.5 9.4

Tour allowances 63.2 8.5 18.9 5.7 3.8

Night shift allowances 60.4 3.8 23.6 10.4 1.9

Family get together 61.3 9.4 17.9 9.4 1.9

Office parties 51.9 8.5 24.5 7.5 7.5

Monthly achiever recognition

51.9 19.8 13.2 4.7 10.4

Target achievement

recognition and cash prize

50.9 20.8 14.2 4.7 9.4

On call training and guidance by trained supervisor

29.2 8.5 15.1 14.2 33.0

Quality assurance & failure root cause analysis and further training

26.4 11.3 14.2 14.2 34.0

Retirement benefit 59.4 11.3 11.3 3.8 14.2

Mean SD T

Compensation Male 52.66 20.07 -.33

(df = 104) Female 54.16 20.77

Job satisfaction Male 65.69 22.07 1.74

(df = 104) Female 59.15 16.32

Table 3: Sex and compensation satisfaction

Further attempt was made to find out the mean

satisfaction level of males and female respondents. It was

found out that although their mean compensation satisfaction

and job satisfaction level differed slightly, further t test

confirmed that there is no significant difference (Table 3). It

implies that although female employees have problems related

to nightshifts (Jayanthi & Venkatramaraju 2009), the

compensation has not been compromised.

Table 4: Age group and compensation satisfaction

Age group Mean SD F

Compensation 21-25 years 52.18 17.84 3.36*

(df =

102/3)

26-30 years 48.59 19.19

31-40 years 66.0 26.94

>= 41 years 58.17 24.93

Job

satisfaction

21-25 years 64.45 19.08 .75

(df =

102/3) 26-30 years 59.64 16.71

31-40 years 59.50 16.86

>= 41 years 55.83 23.43

*p<.05

The satisfaction perceived from different components of

compensation was obtained from a five point rating scale. The

total score of individual respondents in each component was

compared with their job satisfaction level obtained from a five

point Likert type of scale. The correlation coefficient score

(0.48) of both variables being significant at .001 level of

significance (Table 5) implies that the satisfaction level on

different components of the compensation is highly correlated

with the job satisfaction level.

DISCUSSION AND CONCLUSION

The overall finding suggests that people were relatively

happy with upcoming compensation strategies formulated by

BPOs and compensation had highly correlated with job

satisfaction. This finding is in line with other findings that

compensation satisfaction leads to job satisfaction (Sharma &

Bajpai, 2011). The finding that people were satisfied with the

compensation can be substantiated with the finding that

perceived job characteristics positively relates to compensation

satisfaction (Yen & McKinney, 1992) and so far as the job

characteristics of Indian BPOs are concerned they have a

formal, structured, and rationalized HRM system (Budhwar,

Luthar and Bhatnagar 2006). Moreover, in support of the

previous findings (Dreher, Ash & Bretz, 1988), this study found

out that there is age difference so far as perception of

compensation satisfaction is concerned.

Our findings are in line with certain surveys conducted by

reputed organizations. For example, a Towers Watson's Global

Workforce Study (2010) noted that increasingly more

employees in India are taking an opportunistic attitude and are

open to job shifts to advance their careers. Similarly, our study

also found that the people are more interested to find on the job

training, interested to study more while working and which

would enhance their career path. As per the same study, only

25 percent Indians and 23 percent of Chinese employees listed

working for one organisation as their preferred career model.

This trend in China and India is symptomatic of growing

economies and the optimism it generates. Employees here are

more bullish about the future and are willing to follow

opportunities as they arise. To retain talent, India Inc will have

to increasingly engage its employees in every aspect-be it

competitive pay, learning opportunities, challenging work,

career advancement opportunities or being an employer of

choice. Because with the time our study found the ITES/BPO

sector is also getting matured people who're looking for long

term career within this sector are slowly trying to get settled

and looking for long term growth and career. Despite being a

decade or more removed from a highly paternalistic

employment deal in parts of the world, findings in several

11

studies now indicating that self-reliance is more of an

intellectual construct than the behavioral reality for

employees. This is most obvious when it comes to employees’

views about providing for their working lives and into

retirement. The study shows that globally employees

understand that, they are solely or chiefly responsible for

ensuring their futures and their long-term financial and

physical health and well-being. Our study also shows that

pattern and validates the above observations. Many employees

are currently sacrificing advancement for job security.

Moreover, Indian BPOs are not far behind so far as good

human resource practices are concerned. One of the recent

finding suggest that a number of Indian BPO firms employ

exclusivist strategies, such as open human resource policies

and other collectivistic human resources practices such as team

reward and compensation, team performance evaluation, etc.

(Sarkar, 2009).

This study pertains to a small part of India i.e. Orissa and

the findings of the study should be generalized with caution.

Other limitations of the study include non probability

sampling and small sample size. However, the findings

generated can be directly helpful for the BPOs at Orissa and

some generalizations for India can be taken with caution.

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Table 5: Compensation satisfaction correlation

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Job satisfaction 61.12 17.94

***p < .001


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*Assistant Professor, Jagannath International Management School, Kalkaji, New Delhi. Email id: [email protected]

INTRODUCTION

The Indian capital market has witnessed a major

transformation and structural change during the past one

decade or so as a result of ongoing financial sector reforms

initiated by the Government of India since 1991 in the wake of

policies of liberalization and globalization. In addition to these

developments, India is perhaps one of the real emerging

markets in South Asian region that has introduced derivative

products on two of its principal existing exchanges viz., BSE

and NSE in June 2000 to provide tools for risk management to

investors. The Foreign exchange and Interest rate derivative

markets have been undergoing a reform over the last decade

and a half and have witnessed a growth in size, product profile,

nature of participants and the development of market

infrastructure across all segments. The temporal relation

between stock Index and Index futures has been and continues

to be of interest to regulators, academicians and practitioners

alike for a number of reasons such as market efficiency,

volatility and arbitrage. The apparent increase in volatility has

been attributed to increased information flow in the market

through the channel of futures trading. On the other hand,

Kamara et al. (1992) found no increase in spot market volatility

due to introduction of futures trading. Ross (1989)

demonstrates that under conditions of no arbitrage variance of

price change must be equal to the variance of information flow.

It follows therefore, that if futures increase the flow of

information then in absence of arbitrage opportunities the

volatility of the spot price must change and hence increase in

volatility.

OBJECTIVE OF THE STUDY

This paper is aimed at examining the impact of trading of

index futures on volatility of the underlying stock market. It

also examines the relative volatility of index futures market

and NIFTY Index.

LITERATURE REVIEW

In one study Hogan, Kroner and Sultan [1997] examined

the programme trading and non-programme trading activities

The Financial Markets across the globe have become

volatile. They are mainly driven by news and events in the

world markets. This volatility has a direct impact on Indian

economy, which is increasingly getting exposed to the global

markets in the post liberalization era. The liberalized policy

being followed by the Government of India and the gradual

withdrawal of the procurement and distribution channel

necessitated for introduction of a market mechanism to

perform the economic functions of price discovery and risk

management. In order to improve market-efficiency and for the

free movement of financial assets, the importance of hedging

and risk management through derivative products has grown

substantially. In terms of the advancement in the derivative

markets, and the variety of derivatives users, Indian Market

has equalled or exceeded many other regional markets of Asia.

The introduction of equity and equity index derivative

contracts in Indian market has not been very old but today the

total notional trading values in derivatives contracts are ahead

of cash market. On many occasions, the derivatives notional

trading values are double the cash market trading values.

Given such dramatic changes, the present paper seeks to

outline the behaviour of volatility in financial markets and

examining the impact of trading of index futures on volatility

of the underlying stock market. It also examines the relative

volatility of index futures market and underlying stock market.

Keywords: Derivatives, Futures, Risk Management,

Volatility

A Study of Derivatives Trading in India:Apropos to The Recessionary Forces Dr. Niti Saxena*

relating to S&P 500 index futures. They reported that futures

transactions produced a greater spot volatility. Pericli and

Koutmas [1997] examined S&P 500 returns over the period

1953 to September 1994. They reported no incremental effect on

underlying market volatility as a result of introduction of index

futures Similarly, Galloway and Miller [1997] examined the

Mid Cap 400 index to investigate the change in volatility after

the introduction of futures contracts on the index. However,

they found no evidence of any increased volatility. In contrast

to other studies, their results, however, indicated some

reduction in volatility of the underlying. Similarly, the earlier

studies on other US indices point to similar results. Choi and

Subramaniam [1994] found no significant effect on returns

volatility on the MMI following the introduction of an MMI

futures contract. Lockwood & Linn [1990] used daily intra-day

open-to-close returns for the DJIA over the 1964-1989 period,

reported higher volatility of the DIJA following introduction of

VLCI futures contracts. Several studies on the non-US indices

reported more or similar results. For instance, the study by

Freris [1990] found no volatility increase on Hong Kong’s Hang

Seng Index after the introduction of futures contracts. Oliveira

& Armada [2001] examined the impact of introduction of PSI-

20 index futures on the Portuguese stock market. Their results

were not conclusive in supporting the notion that the

introduction of the PSI-20 index futures increased the

Portuguese stock market volatility.

TYPE OF RESEARCH AND NATURE OF DATA

The research study is empirical in nature. The data

employed in the study consists of daily prices of one major

stock market index viz., the S&P CNX Nifty Index for a four

year period from June 2007 to June 2010. For each of these

indices four sets of prices were used. These were daily high,

low, open, and close prices. Likewise, daily high, low, open,

and close prices were used from June 2008 to March 2010 for the

Nifty Index Futures.

SOURCE OF DATA

The necessary data have from collected from the

Derivative Segment of NSE- S&P CNX Nifty. The study has

used four measures of volatility: (a) the first is based upon

close-to-close prices, (b) the second is based upon open-to-

open prices, (c) the third is Parkinson’s Extreme Value

Estimator and (d) the fourth is Garman-Klass measure

volatility (GKV).

TOOLS OF ANALYSIS

Following Ibrahim et al. [1999] and Karet.al. [2000], the

study has used four measures of volatility. The first measure is

based upon close-to-close prices. Therefore, in the first place,

the daily returns based on closing prices were computed using

equation

Rt = Ln (Ct/Ct-1) ..... (1)

Where Ct and Ct-1 are the closing prices on day t and t-1

respectively; Rt represents the return in relation to day t. Next,

the variance of this return series has been computed to

understand the inter-day volatility by using equation:

T

ó2 = ? (Rt –R) 2 / T-1 ..... (2)

T=1

T

R = ? (R t) / T ..... (3)

t=1

The second measure of volatility is based upon open-to-

open prices. Analogously, it is computed based on the variance

of the daily returns series based on open-to-open prices. The

third measure of volatility estimates intra-day volatility. It has

been estimated by using Parkinson’s [1980] extreme value

estimator, which is considered to be more efficient.

ó= K v Ln (Ht/Lt) 2/N ..... (4)

Where K=0.601 and Ht and Lt, denote intra-day high and

low respectively. This equation has been used to estimate the

intra-day volatility, which is popularly referred to as high-low

volatility.

HYPOTHESES OF THE STUDY

The study tests the following hypotheses:

1. The volatility of the underlying stock market has not

changed due to trading of index futures during the above

mentioned time period.

2. There is no significant difference between the relative

volatility of the underlying stock market and the futures

market.

In this study, use of F-test has been made for testing the

null hypotheses. (Using 5% Significance level).

DISCUSSION AND ANALYSIS

Firstly, the empirical results pertaining to impact of

trading of index futures contracts on the stock market volatility

in respect of NIFTY index has been discussed. Tables 1 to 3

below show the effect of trading of Index Futures on Nifty

Index in respect of ln (Ct/Ct-1) ln (Ot/Ot-1) and ln (Ht/Lt)

respectively for several window periods. The tables test

whether stock market volatility is significantly lower (higher)

for different periods trading of index futures contracts on the

Nifty Index during the above mentioned time-period.

Interestingly, the volatility of the spot market seems to have

declined post during the trading of index futures for all the

window periods in respect of all the three measures. The

results are statistically significant at 5% level of significance for

most of window periods thereby supporting the view that post

introduction and further trading the volatility of the Nifty

Index has declined.


In sum, the results reported here indicate that the trading

of futures contracts on NIFTY have resulted in reduction in

volatility of the underlying market. This rejects the null

hypothesis that volatility of the underlying stock market has

not changed due to trading of index futures during the above

mentioned time period. The results of relative volatility of

futures and spot market in respect of NIFTY index has been

done to check whether index futures are more (less) volatile

than the underlying spot index. Table 4 examines results

relating to Nifty Index. The empirical results relating to relative

volatility of Nifty index futures and Nifty spot index are given

in Tables 4, 5 and 6 giving the daily volatility for each month

from June 2008 to June 2010 for the near month futures

contracts and for the spot market using the close-to-close

volatility measure given by ln (Ct/Ct-1) and open-to-open

volatility measure given by ln (Ot/Ot-1) respectively. An

examination of Table 4 reveals that in terms of the first measure

volatility of futures and the spot market does not seem to be

different for any of the months studied, as none of the F-ratios

is statistically significant. Similarly, for the total period, the

volatility for the two markets is not significantly different from

each other. However, the results for open-to-open volatility

measure are somewhat different from those of close-to-close

measure. Here, the volatility for the two markets was found be

significant for six months. These months are: October-

December 2010, January, April, and December 2009. However,

for the rest of the months the volatility of the futures and spot

markets were not found to be statistically significant. Similarly,

for the overall period, the volatility for the two markets is not

statistically significant (Table 5). The intra-day volatility

results given by ln (Ht/Lt) are also somewhat different in

comparison to those based on the close-to close measure. In

respect of three months viz., June, November 2008, and August

A Study of Derivatives Trading in India: Apropos to The Recessionary Forces 15

Table 2: Effect of trading of index future on Nifty Index (Measure Ln (Ot /Ot-1))

Table 1: Effect of trading of index future on Nifty Index (Measure Ln (Ct/Ct-1)

Ln (Ct/Ct-1)

S.D Before S.D after F-ratio

1 month (June 2007)

0.017670 0.012042

2.153238*

2 month 0.020221 0.015259 1.756132*

3 month 0.026067 0.014097 3.419090*

6 month 0.026885 0.015577 2.978880*

9 month 0.023848 0.015569 2.346294*

12 month 0.021655 0.016927 1.636584*

15 month 0.019996 0.015664 1.629521*

18 month 0.020676 0.016035 1.662560*

21 month 0.020346 0.015703 1.678694*

24 month 0.020097 0.015279 1.730255*

27 month 0.019875 0.015995 1.765051*

30 month 0.021566 0.016282 1.730175*

33 month 0.020155 0.015355 1.624551*

36 month (June 2010)

0.019665 0.016773 1.635562*

Source: Compiled and calculated from NIFTY index

Ln (Ot/Ot-1)

S.D Before S.D after F-ratio

1 month (June 2007)

0.02081

0.01317

2.49621*

2 month 0.02071 0.01588 1.70127*

3 month 0PGDM1-A 0.01453 3.26610*

6 month 0.02755 0.01562 3.11018*

9 month 0.02435 0.01537 2.51051*

12 month 0.02205 0.01688 1.70632*

15 month 0.02035 0.01566 1.68853*

18 month 0.02185 0.01623 1.81417*

21 month 0.02165 0.01575 1.88887*

24 month 0.02108 0.01530 1.89800*

27 month 0.02090 0.01601 1.87631*

30 month 0.02075 0.01544 1.66683*

33 month 0.02055 0.01502 1.69233*

36 month (June 2010)

0.02002 0.01622 1.83422*


Ln (H/L) S.D Before S.D after F-ratio

1 month

(June 2007)

0.020623

0.012944

2.538568*

2 month 0.021051 0.015964 1.738808*

3 month 0.026071 0.014401 3.277241*

6 month 0.026966 0.014986 3.237953*

9 month 0.024309 0.035107 2.085715*

12 month 0.021928 0.016458 1.775196*

15 month 0.020099 0.015258 1.735393*

18 month 0.019800 0.015419 1.648878*

21 month 0.018945 0.015105 1.572977*

24 month 0.018241 0.014616 1.557555*

27 month 0.019708 0.014516 1.555665*

30 month 0.022282 0.014456 1.546552*

33 month 0.020054 0.015433 1.532445*

36 month

(June 2010)

0.018254 0.014352 1.523556*

Table 3: Effect of trading of Index Future on Nifty Index (Measure Ln (Ht/Lt))


Ln (Ct/Ct-1) Observations S.D of Nifty Index Future S.D of Nifty Index F-ratio

June 2008 13 0.011802 0.012578 1.135691

July 2008 19 0.018449 0.018175 1.03042

August 2008 22 0.010537 0.010806 1.051727

September 2008 19 0.020538 0.021116 1.057074

October 2008 17 0.018242 0.01778 1.052642

November 2008 22 0.013719 0.013888 1.024781

December 2008 19 0.013842 0.014353 1.075114

Jan 2009 19 0.010222 0.00957 1.140758

February 2009 19 0.010222 0.00957 1.140758

March 2009 16 0.011304 0.011566 1.046744

April 2009 17 0.023246 0.024113 1.076031

May 2009 22 0.008562 0.008856 1.069895

June 2009 20 0.011702 0.012536 1.147566

July 2009 19 0.009873 0.010352 1.099404

August 2009 20 0.004129 0.00543 1.729219

September 2009 19 0.027027 0.025016 1.167245

October 2009 18 0.012252 0.01252 1.044192

November 2009 20 0.012592 0.011811 1.136663

December 2009 17 0.011392 0.010538 1.168639

Jan-2010 22 0.01312 0.01202 1.191432

February 2010 21 0.01465 0.014874 1.030819

March 2010 19 0.008984 0.011762 1.714212

April 2010 22 0.008556 0.011093 1.680846

May 2010 22 0.011373 0.013422 1.392723

June 2010 20 0.009799 0.011262 1.320883

Total 484 0.015044 0.015126 1.01096

2009 the spot index volatility was significantly higher than the

near month futures contracts. However, for the overall period,

the volatility for the two markets is not statistically significant

(Table 5). The results for the GKV measure are more or less

similar to those of Ln (Ht/Lt) measure. Here, too, the spot

volatility for only three months viz., June 2000, November

2000, and August 2001, was significantly higher than the near

month futures contracts. However, for the total period, the

volatility for the two markets is not significantly different from


each other (Table 6) market and the futures market. The GKV

measure for the Nifty Futures and Nifty Index given:

ó =v 1/n ? [(.5)[ln9Ht/Lt)] – [2ln(2)-1][Ln (Ct/ Ot)] 2 2

It reports daily price volatility contract by contract. Each

contract expires at the end of the month. The actual number of

trading days has been taken into account for computing the

Volatility measure. Volatility for the two indices is significant

at 5 % level of significance

Table 4: Daily Price Volatility: Nifty Index Futures and Nifty Index (Ln (Ct/Ct-1))


17A Study of Derivatives Trading in India: Apropos to The Recessionary Forces

Table 5: Daily Price Volatility: Nifty Index Futures and Nifty Index (Ln (Ht/Lt))


Ln (Ht/Lt) Observations S.D of Nifty Index Future S.D of Nifty Index F-ratio

June 2008 14 0.0093 0.014877 2.559125*

July 2008 19 0.016197 0.018633 1.323373

August 2008 22 0.009908 .010692 01.164347

September 2008 19 0.014914 0.017571 1.388129

October 2008 17 0.02337 0.018322 1.627026

November 2008 22 0.018317 0.012366 2.194241*

December 2008 17 0.012864 0.012863 1.000232

Jan 2009 19 0.013465 0.011456 1.381373

February 2009 16 0.010619 0.011485 1.169721

March 2009 20 0.028951 0.027462 1.111345

April 2009 17 0.019982 0.022246 1.239553

May 2009 22 0.008878 0.011072 1.555256

June 2009 20 0.009467 0.011583 1.496846

July 2009 19 0.007756 0.009736 1.575771

August 2009 20 0.004018 0.006786 2.851785*

September 2009 19 0.018291 0.022789 1.552398

October 2009 18 0.010035 0.011218 1.249554

November 2009 20 0.011097 0.012297 1.228101

December 2009 17 0.012864 0.012863 1.000232

Jan-2010 22 0.010713 0.011198 1.092745

February 2010 21 0.011475 0.013152 1.313794

March 2010 22 0.006985 0.009362 1.796282

April 2010 22 0.006985 0.009362 1.796282

May 2010 22 0.009821 0.01229 1.566202

June 2010 20 0.007351 0.010093 1.885167

Total 484 0.013604 0.014413 1.122521

Table 6: Daily Price Volatility: Nifty Index Futures and Nifty Index (GKV measure)

GKV Observations S.D of Nifty Index Future S.D of Nifty Index F-ratio

June 2008 14 0.009277 0.015063 2.636592*

July 2008 19 0.01418 0.018448 1.692492

August 2008 22 0.01036 0.010842 1.095163

September 2008 19 0.014862 0.016228 1.192271

October 2008 17 0.02419 0.018909 1.636608

November 2008 22 0.017539 0.011529 2.314504*

December 2008 19 0.009358 0.01312 1.965667

Jan 2009 19 0.011672 0.011773 1.017483

February 2009 16 0.01039 0.011582 1.24276

March 2009 20 0.027613 0.026887 1.054728

April 2009 17 0.018824 0.022823 1.469923

May 2009 22 0.009174 0.011784 1.649741

June 2009 20 0.009095 0.011114 1.493025

July 2009 19 0.007115 0.009707 1.861326

August 2009 20 0.003969 0.007247 3.333916*

September 2009 19 0.016734 0.021293 1.61911

October 2009 18 0.010051 0.011141 1.228685

November 2009 20 0.010166 0.011979 1.388394

December 2009 17 0.013477 0.013651 1.026025

Jan-2010 22 0.010733 0.011726 1.193435


FINDINGS AND SUGGESTIONS

The empirical results reported here indicate that the over-

all volatility of the underlying stock market has declined after

the introduction of index futures on NIFTY index in terms of all

the three measures i.e. Ln (Ct/Ct-1) Ln (Ot/Ot-1) and Ln

(Ht/Lt). However, there is no conclusive evidence, which

suggests that, the futures volatility is higher (lower) in

comparison to the underlying stock market for NIFTY in terms

of all the four measures of volatility. In fact, there is some

evidence that the futures volatility is lower in some months in

comparison to the underlying stock market for both of these

indices. In India, there has been a phenomenal growth in

derivative market in the last few years. However, there is still a

long way to go. Institutional participation is still very low for a

number of reasons, the prime one amongst them is the position

limit cap imposed by the regulator on FIIs. Each FIIs gross

exposure in an index product is restricted to a max of 15% of the

open interest or Rs. 100 cr. The limit for single stock product is

20% of the market wide limit or Rs. 50 cr., whichever is lower.

Another hurdle towards the growth of derivatives is the

overall cap on the total gross position in any underlying asset,

which is currently set at the lower of 30 times average daily

volume in the stock or 10% of free float. It is very essential that

this limit also to be revised. Indian debt markets are used to

trading on YTM basis whereas interest rate futures are settled

on the basis of zero coupon yield curve. It is because of this

reason that interest rate futures have not become popular till

date. Banks, which are major players in fixed income market,

have been permitted to use futures only for hedging. This poses

a restriction on their participation. Also, there is a need for

clarity regarding accounting and taxation. The following

suggestions are given in this regard as follows:

1. Derivatives market should be developed in order to keep

it at part with other derivative markets in the world. There

must be more derivative instruments aimed at individual

investors.

2. SEBI should conduct workshops and seminars regarding

the use of derivatives to educate individual investors.

SEBI should take necessary steps for improvement in

Derivative Market so that more investors can invest in

Derivative market.

3. There is a need of more innovation in Derivative Market

because in today scenario even educated people also fear

for investing in Derivative Market Because of high risk

involved in Derivatives.

4. Contract size should be minimized because small

investors cannot afford this much of huge premiums.

Speculation should be discouraged.

5. RBI should play a greater role in supporting derivatives.

CONCLUSION

The advancement in the derivative markets is still in its

formative stage and there is great scope for further

development. In order to achieve good derivative market

operations regulators and exchanges in consultation with

market participants should come up with necessary regulatory

changes, which are friendly to all. Apart from this what is more

required is that players should have a strong financial base to

deal in derivative contracts, proper capital adequacy norms,

training for financial intermediaries and brokers for a more

liberal and strong derivative mechanism in India to face the

volatility of the upswings in the financial markets in India and

across the globe.

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Growth Pattern and Trading Volume Effects?, The ICFAI

Journal of Derivatives Markets, Vol. V, No. 1, pp.62-70.

2. Karet.al 2000, “Stock Market Volatility: A Comparative Study

of Selected Markets”, Working Paper No.2, Securities &

Exchange Board of India, Mumbai.

3. Ibrahim, A.J., Othman, K, and Bacha O.I. 1999, “Issues in stock

Index Futures.

4. Introduction and Trading: Evidence from the Malaysian Index

Futures Market”, A paper presented at the Annual Conference

of Asia-Pacific Finance Association, Melbourne, 1999.

5. Gupta, L.C.1997, “Report on the Committee on Derivatives”,

Securities Exchange Board of India, Mumbai, 1997.

6. Choudhury, T. 1997, “Short-Run Deviations and Volatility in

Spot and Futures Stock Returns: Evidence from Australia,

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705.

7. Koutmas, G. and Tucker, M. 1996, “Temporal Relationship and

Dynamic Interactions Between Spot and Futures Stock

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8. Brown, Hurska S. and Kuserk, G. 1995, “Volatility, Volume,

and The Notion of Balance in the S & P 500 Cash and Futures

Markets”, Journal of Futures Markets, pp.677-689.

9. Choi, H. and Subramanyam, A. 1994, “Using Intraday Data to

Test For Effects of Index Futures on the Underlying Stock

Markets”, Journal of Futures Markets, pp.293- 322.

10. Baillie, Richard T., Bollerslev, Tim: Prediction in dynamic

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11. Nelson, D. B., Cao C. Q., Inequality Constraints in the

Univariate GARCH Model, Journal of Business and Economic

Statistics, 1992, 229-35.

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Market on Australian Share Market Volatility”, Journal of

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February 2010 21 0.010244 0.012497 1.48814

March 2010 19 0.009925 0.011092 1.248992

April 2010 22 0.006428 0.008889 1.912604

May 2010 22 0.009817 0.011855 1.458138

June 2010 20 0.007043 0.009814 1.941718


13. Chu, C.C. and Bubnys, E.L. 1990, “A Likelihood Ratio Test of

Price Volatilities: Comparing Stock Index Spot and Futures”,

Financial Review, 46, pp.1791-1809.

14. Freris, A.F. 1990, “The Effects of The Introduction of Stock

Index Futures on Stock Prices: The Experience of Hong Kong

1984 - 1987”, Pacific Basin Capital Market Research, pp.409-

416

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Behaviour of Prices in the Nikkei Spot and Futures Market”,

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stock market volatility? NSEWorking Papers, 2003,

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19A Study of Derivatives Trading in India: Apropos to The Recessionary Forces

*Assistant Professor (HR & OB), Amity Business School, Amity University Noida, Uttar Pradesh. Email: [email protected]

**Assistant Professor, Manav Rachna International University, Faridabad, India. Email: [email protected]

***Student, Amity Business School.

INTRODUCTION

Culture is something that you cannot actually see, except

through its physical manifestations in your work place. In

many ways, culture is like personality. In a person, the

personality is made up of the values, beliefs, underlying

assumptions, interests, experiences, upbringing, and habits

that create a person’s behavior.

An organization’s culture is made up of all of the life

experiences each employee brings to the organization. Culture

is especially influenced by the organization’s founder,

executives, and other managerial staff because of their role in

decision making and strategic direction.

Work culture is often interpreted differently by diverse

employees. Other events in people’s lives affect how they act

and interact at work too. Although an organization has a

common culture, each person may see that culture from a

different perspective. Additionally, your employees’

individual work experiences, departments, and teams may

view the culture differently.

Culture may be strong or weak. When work culture is

strong, most people in the group agree on the culture. When

work culture is weak, people do not agree on the culture.

Sometimes a weak organizational culture can be the result of

many subcultures, or the shared values, assumptions, and

behaviors of a subset of the organization.

For example, the culture of company as a whole might be

weak and very difficult to characterize because there are so

many subcultures. Each department or work cell may have its

own culture. Within departments, the staff and managers may

each have their own culture.

Central Concepts about Culture

Professors Ken Thompson (DePaul University) and Fred

Luthans (University of Nebraska) highlight the following

seven characteristics of culture through my interpretive lens.

Culture is made up of the values, beliefs, underlying

assumptions, attitudes, and behaviors shared by a group of

people. Culture is the behavior that results when a group

arrives at a set of - generally unspoken and unwritten - rules

for working together. The culture of company as a whole might

be weak and very difficult to characterize because there are so

many subcultures. Each department or work cell may have its

own culture. The aim of the paper is to study the impact of work

culture on the performance of the employees at Ester Industries

Limited. The exploratory research was used to gather

preliminary information which helped in defining the

problems and suggest hypotheses. The relationship between

work culture and performance management system was

studied and the effect of the work culture on PMS was found

out to be 3.1%.Company should conduct seminars and

different activities to develop team spirit amongst employees.

HR should make ensure that the job description clearly defines

KRA’S. Employees should be involved in the process of goal

setting.

Keywords: Performance management system,

organizational culture, KRA, attitude, rewards, innovation,

teams.

Impact of work culture on performance-A life study at Ester Industries Limited

Mr. Rajnish Ratna*Ms. Neeraj Kumari**

Ms. Sarbjot Kaur***

• Culture = Behavior. Culture is a word used to describe the

behaviors that represent the general operating norms in

your environment. Culture is not usually defined as good

or bad, although aspects of your culture likely support

your progress and success and other aspects impede your

progress.

A norm of accountability will help make your

organization successful. A norm of spectacular customer

service will sell your products and engage your employees.

Tolerating poor performance or exhibiting a lack of discipline

to maintain established processes and systems will impede

your success.

• Culture is learned: People learn to perform certain

behaviors through either the rewards or negative

consequences that follow their behavior. When a behavior

is rewarded, it is repeated and the association eventually

becomes part of the culture. A simple thank you from an

executive for work performed in a particular manner

molds the culture.

• Culture is learned Through Interaction. Employees learn

culture by interacting with other employees. Most

behaviors and rewards in organizations involve other

employees. An applicant experiences a sense of your

culture, and his or her fit within your culture, during the

interview process. An initial opinion of your culture can

be formed as early as the first phone call from the Human

Resources department.

• Sub-cultures Form Through Rewards. Employees have

many different wants and needs. Sometimes employees

value rewards that are not associated with the behaviors

desired by managers for the overall company. This is often

how subcultures are formed, as people get social rewards

from coworkers or have their most important needs met in

their departments or project teams

• People Shape the Culture. Personalities and experiences

of employees create the culture of an organization. For

example, if most of the people in an organization are very

outgoing, the culture is likely to be open and sociable. If

many artifacts depicting the company’s history and values

are in evidence throughout the company, people value

their history and culture. If doors are open, and few closed

door meetings are held, the culture is unguarded. If

negativity about supervision and the company is

widespread and complained about by employees, a

culture of negativity, that is difficult to overcome, will take

hold.

• Culture is negotiated. One person cannot create a culture

alone. Employees must try to change the direction, the

work environment, the way work is performed, or the

manner in which decisions are made within the general

norms of the workplace. Culture change is a process of

give and take by all members of an organization.

Formalizing strategic direction, systems development,

and establishing measurements must be owned by the

group responsible for them. Otherwise, employees will

not own them.

• Culture is Difficult to Change. Culture change requires

people to change their behaviors. It is often difficult for

people to unlearn their old way of doing things, and to

start performing the new behaviors consistently.

Persistence, discipline, employee involvement, kindness

and understanding, organization development work, and

training can assist you to change a culture.

The following aspects can broadly define the likely

preferred work culture in today’s organizations which

contribute to a satisfied workforce:

• Work timings: Flexible work timings have gained

immense popularity amongst today’s organizations.

Organizations have started giving their employees the

leverage of entering the office premises at anytime of their

convenience and completing their designated tasks,

though a minimum hours have to be spent in the

workplace

• Work from Home: Another concept which is gaining

importance, more amongst female workers, is the concept

of “work from home”. Organizations are largely investing

in equipments with the aid of which employees will have

the benefit to stay at home and at the same time stay

connected to the office network

• Business Attire: As opposed to formal business attire for

day to day work, organizations have now remodeled their

policy on daily dress code to the widely preferred business

casuals which also includes denim on one day of work. A

few organizations also have a policy of Friday dressing

where only casuals can be worn by their employees

• Flat Hierarchy: The preferred organization structure is a

flat organization structure with few levels of hierarchy

which enables fast decision making and easy accessibility

to top management. People who stay closer to customers

know better the market needs and can respond faster to

rapidly changing customer requirements and such

changes can be easily highlighted and brought to the

notice of the top management in a flat hierarchy. Another

emerging trend in today’s organization are meetings with

supervisors supervisor which helps in smooth interaction

within different levels of management which is very

effective within a flat hierarchy

• Decentralization: This is the process of dispersing

decision-making governance to the employee at the

lowest level of the hierarchy and giving them the right to

exercise a few decisions all by themselves which acts as a

great time saving and cost cutting mechanism

• Innovation: The increasing demand of today’s workforce

is acknowledgment and implementation of their ideas and

thus organizations have now started investing in

employee innovation where young and fresh ideas are

being recognized as best practices

• Rewards & Recognition: With the increase in stress levels,

with long working hours how does an organization aim to

create contributing and motivated employees, how do

organizations maintain the high employee morale and the

quality of life are some of the key concerns of today’s

organizations and one of the many answers to these

question is an effective reward and recognition system.

Apart from the performance appraisal system

organizations today are investing a lot in reward and

recognition programs where employees are rewarded as

Impact of work culture on performance-A life study at Ester Industries Limited 21

Star employees and key achievers, long Service awards are

announced for employees who work with the

organization for a long tenure, Employee referral

programs motivates an employee to bring their friends to

work with them

• Employee Recreation: Employee recreation programs

have been shown to reduce absenteeism, increase

performance and productivity, reduce stress levels, and

increase job satisfaction. The new term coined to define

employee recreation is associate engagement. A few

examples of employee recreational activities are office

outings, invitation to employees family to come and visit

employees workplace, annual sports event, team outings,

decoration of employee workspace, organizing music

clubs, dance clubs, drama clubs, arranging training for

special areas of interest of the employees

• Employee Benefits: Benefits are forms of value, other than

payment, that are provided to the employee in return for

their contribution to the organization. Employee benefits

typically refers to retirement plans, health life insurance,

life insurance, disability insurance, vacation, employee

stock ownership plans, membership to clubs, special

offers and discounts on premium products and outlets,

sponsorship for education of employees children,

attractive schemes from financial institutions on purchase

of assets, subsidized food in canteen

OCTAPACE

The OCTAPACE profile is a 40-item instrument that gives

the profile of organization's ethos in eight values. These values

are openness, confrontation, trust, authenticity, pro action,

autonomy, collaboration and experimentation. The instrument

contains two parts. In part I, values are stated in items 1 to 24

(three statements of each of the eight values), and the

respondent is required to check (on a 4-point scale) how much

each item is valued in his organization. Part 2 contains sixteen

statements on beliefs, two each for eight values, and the

respondent checks (on a 4-point scale) how widely each of

them is shared in the organization.

In addition to checking the items on the extent of their

importance or sharing in the organization, the respondent can

also check how much they should be valued, or how much the

beliefs are useful. Thus both present as well as desired and

ideal profiles can be obtained.

The following processes are the dimensions of work

culture for the survey:

OPENNESS: Openness can be defined as a spontaneous

expression of feelings and thoughts, and the sharing of these

without defensiveness. Openness is in both directions,

receiving and giving. Both these may relate to ideas (including

suggestions), feedback (including criticism), and feelings. For

example, openness means receiving without reservation, and

taking steps to encourage more feedback and suggestions from

customers, colleagues and others.

CONFRONTATION: Confrontation can be defined as

facing rather than shying away from problems. It also implies

deeper analysis of interpersonal problems. All this involves

taking up challenges. The term confrontation is being used

with some reservation and means putting up a front as

contrasted with putting one's back to the problem. A better

term would be confrontation and exploration (CE).

TRUST: Trust is not used in the moral sense. It is reflected

in maintaining the confidentiality of information shared by

others, and in not misusing it. It is also reflected in a sense of

assurance that others will help, when such help is needed and

will honor mutual commitments and obligations. Trust is also

reflected in accepting what another person says at face value,

and not searching for ulterior motives. Trust is an extremely

important ingredient in the institution building processes.

AUTHENTICITY: Authenticity is the congruence

between what one feels, says and does. It is reflected in owning

up one's mistakes, and in unreserved sharing of feelings.

Authenticity is closer to openness. The outcome of authenticity

in an organization is reduced distortion in communication.

This can be seen in the correspondence between members in an

organization.

PRO ACTION: Pro action means taking the initiative,

preplanning and taking preventive action, and calculating the

payoffs of an alternative course before taking action. The pro

action can be contrasted with the term react. In the latter, action

is in response to an act from some source, while in the former

the action is taken independent of the source. For example, if a

person shouts back at his friend's accusation he shows reactive

behavior. However, if he does not use this pattern but responds

calmly and suggests that they discuss the problem together, he

is showing proactive behavior.

AUTONOMY: Autonomy is using and giving freedom to

plan and act in one's own sphere. It means respecting and

encouraging individual and role autonomy. It develops

mutual respect and is likely to result in willingness to take on

responsibility, individual initiative, better succession

planning. The main indicator of autonomy is effective

delegation in organization and reduction in references made to

senior people for approval of planned actions.

COLLABORATION: Collaboration is giving help to, and

asking for help from, others. It means working together

(individuals and groups) to solve problems and team spirit.

The outcome of collaboration includes timely help, team work,

sharing of experiences, improved communication and

improved resource sharing. The indication could be

productivity reports, more meetings, and involvement of staff,

more joint decisions, better resource utilization and higher

quality of meetings.

EXPERIMENTING: Experimenting means using and

encouraging innovative approaches to solve problems; using

feedback for improving, taking a fresh look at things, and

encouraging creativity. We are so caught up with our daily

tasks that we often only use traditional, tried and tested ways

of dealing with problems.


Performance Management System

Performance Management is often a misunderstood

concept most people associate it with concepts such as:

Performance appraisal, Performance-related pay, Targets and

objectives, Motivation and discipline. But, performance

management is much more than this. Performance

management is about getting results. It is concerned with

getting the best from people and helping them to achieve their

potential. It is an approach to achieving a shared vision of the

purpose and aims of the organization. It is concerned with

helping individuals and teams achieve their potential and

recognize their role in contributing to the goals of the

organization.

A performance management system consists of the

processes used to identify, encourage, measure, evaluate,

improve, and reward employee performance at work

Employees’ job performance is an important issue for all

employers. However, satisfactory performance does not

happen automatically; therefore, it is more likely with a good

performance management system.

Performance management process is composed of four

main stages:

1. Planning Performance

2. Managing Performance

3. Reviewing Performance

4. Rewarding Performance

1. Planning Performance

As with the introduction of any process, there first needs

to be clarity about the primary reason for introducing

performance management and a clear view about what it is

expected to deliver in terms of results. There also needs to be

strong commitment from the top to the introduction of process,

as without this commitment it will be difficult to gain support

from the lower echelons of organizations and insufficient

resources may be allocated to achieve the desired result.

The next logical step in designing a performance

management system is the setting of objectives.

Objective Setting

An objective may be defined as a “clear statement

indicating how a particular output will be achieved in both

quantitative and qualitative terms”. Good objectives should

conform to what have been described as “SMART’ criteria, i.e.

they should be:

• Specific: As precise as possible and relating to only one

identifiable output.

• Measurable: Or it will be difficult, if not impossible, to

judge when they have been achieved.

• Achievable: Or they will lose credibility, be demoralizing

and serve no useful purpose.

• Result oriented: Be related to the end result which is to be

achieved.

• Time related: Objectives without a clear timescale give no

guidance on priorities.

Competency Based Objectives

It has been stated that objective should, as far as possible,

be specific and measurable. This means using clear output

measures wherever possible. For many jobs, however, outputs

are not all clear. While generally it is easy to determine the

performance measures for the most senior management posts

in the organization, usually based on overall organization

performance and including such parameters as earning per

share, and for the most junior posts which are likely to be task

based, it is much more difficult for those posts in the middle

where there is a less direct link with outputs. Similarly even

where there are clear measures, to focus on unit of production

alone could neglect the qualitative and development aspects of

any role.

Any performance management scheme should therefore

have a mixture of quantifiable outputs and more behaviorally

based competencies. The important points in using

competencies as performance measures are:

• They must be worded in such a way that they can be

objectively assessed, otherwise they run the risk of

becoming just shopping list of desirable traits.

• They must be relevant to the job.

• There should be a common core of competencies for jobs

operating in same environment; otherwise it will be

difficult to establish common standards.

• They should mot be too numerous otherwise the same

thing may be measured more than once.

Managing Performance

Once performance objectives have been set and action

plan agreed, the next stage of the performance management

process is to ensure that those plans are acted on and the

required results produced. ‘Management’ in this sense means

more than conducting an annual appraisal, although such

actions will inevitably form an important part of the process.

What it is really about is giving employees the necessary

support and create the appropriate conditions for them to be

able to deliver required results, in effect ‘empowering’ them. In

particular terms that is likely to mean:

• Giving necessary practical support, such as providing the

appropriate resources.

• Ensuring that employees are clear about the results and

giving any advice or clarification that may be needed.

• Giving employees the necessary training and

development to ensure that they are able to achieve their

accountabilities.

• Adjust targets, priorities and performance measures

according to changes in organizational priorities, markets,

government, policies, etc.

Reviewing Performance

Strictly speaking that performance review is part of the

process of managing performance. However, in view of

specific considerations that apply to this aspect of the process it

is convenient to examine it as a separate element.

Where performance appraisal exists, it typically centers

round interview held once or twice a year, between the post


holder and his or her boss. Sometimes the outcomes of this

interview can have a direct bearing on pay or promotion,

whereas in other cases the emphasis is on training and

development. Often performance issues are raised that may

not have been discussed at any time during the year.

Some interviews can be bland, with the employee left with

the impression that he or she is performing satisfactorily even

though that may not be the manager’s true view, this is because

large number of managers find it uncomfortable to be openly

critical of their subordinates’ performance, even though they

may be prepared to make such criticism to third parties. At the

other extreme, interviews can degenerate into sessions for

apportion blames for past failures.

What is ideally required is a process that is constructive

and supportive and that gives advice that can help individual

improve and develop. Able and well-motivated staff will

usually welcome constructive criticism. To achieve this there

are certain principles that need to be adhered to:

• The appraisal interview should not contain any surprises.

The appraisee should be well aware of his/her level of

performance before the interview because of the regular

feedback given by managers.

• The process should be applied to everybody. Every

employee has the right to know how well he/she is doing

and it is an obligation on the part of management to let

him/her know.

• Employee should be encouraged to review their own

performance and give the opinions about how they think

they have done.

• The discussion should be focused on the targets that have

been set and the achievements against those targets.

• Appraisers should remember the rule that they have two

ears and one mouth, to be used in that proportion when

conducting an appraisal interview.

Rating Performance

A crucial part of performance appraisal is judging how

well an individual has performed against identified targets.

Generally, assessing the results will be easier than judging the

quality of those results, but it can be far from straightforward

even when the measure seems obvious. In making judgments

about performance there are a number of key principles to be

adhered to:

• The performance should be judged against overall

objectives, which may have been broken down into

separate targets which together contribute to the overall

objective. For example, an objective of reaching a certain

level of sales may be comprised of target figures for

individual products.

• As far as possible, objectives should be quantifiable,

although for most jobs there will be a mixture of hard

objective measures and competencies.

• Unfortunately there are few short cuts when it comes to

assessing performance. Careful consideration has to be

given to each of the objective and targets and account has

to be taken of the circumstances in which they were

achieved. There is rarely any easy formula that can be

used for a particular measure.

• In rating performance, the appraiser should take account

of every aspect of the job, give an overall rating for the job

as a whole and not be unduly influenced by extremes of

performance in one part of it.

• In considering individual performance, emphasis should

be placed on what are regarded as priority objectives and

the overall performance should be measured against the

post holders’ accountabilities.

• Account should be taken of any internal factors affecting

performance, such as changes to the organization, the

availability of resources, the degree of challenge built into

the accountabilities in first place.

• One of the greatest difficulties any manager experiences in

appraising staff is being objective about the individual.

There is a tendency, naturally, to want to give better

ratings to people we like than to those we are less keen on.

Similarly, judgments can be influenced by the “halo

effect” in which one impressive attribute can tend to make

the appraiser rate the others more highly than they

perhaps deserve. The converse could be described as the

“horns effect”, in which poor performance in one area

could color judgments about other aspects.

• The appraiser should also take account of external

circumstances, particularly in terms of market conditions,

changes to the law or in government policies, and

economic conditions. There are several examples of large

divisionalised companies where some divisions are

buoyant and managers are hitting their targets or

exceeding them with ease, whereas in other divisions of

the company, because of a difficult market, managers

with similar targets struggle to get even close. In such

circumstances account has to be taken of the prevalent

market conditions, even at the risk of undermining what

might be perceived as internal equity.

Rewarding Performance

Rewarding performance is the element of the performance

management process which seeks to give employees some

kind of return for achieving their targets. This is wider than just

financial recompense and includes such things as praise,

greater opportunities for training and development, and

promotion. Very often one of the things most sought by an

employee is the recognition that he or she is doing a good job

and where, for example, this is expressed in terms of bonus it is

very often the recognition rather than the cash that really

matters. It is only when money enters the equation that

rewarding performance become very tricky and the emphasis

her is therefore on the financial aspects.

REVIEW OF LITERATURE

Amir M sharif (2002) did research on “Benchmarking

performance management systems”. The findings were that

merits of bespoke internet technology development and out of

the box portal functionalities.

Roy K Smollan & Janet G. Sayers (2009) did research on

“Organizational culture, change and emotions: A qualitative

study”. The findings were that when participants’ values are

congruent with those of the organization, they tend to react to


change more positively. When emotions are treated with

respect people become more engaged with the change.

Sue Bond (2004) did research on “Organizational culture

and work life conflict in the UK”. The findings were that

organizational culture is significantly associated. Longer

working hours, job status etc. significantly associated with

work life outcomes.

Ronald J. Burke (2002) did research on “Do workaholics

prefer demanding, aggressive and result-oriented

organizational cultures”. The findings were that people

scoring higher on feeling driven to work have stronger

organizational culture preference in general.

Monica Forret Suzanne de Janasz (2005) did research on

“Perceptions of an organization’s culture for work and family:

Do mentors make a difference”. The findings were that

protégés have more favorable perception than non protégés of

the organization’s work family culture.

Parthiban Palanisamy (2011) did research on “Integrated

model for performance management system of manufacturing

unit”. The findings were that model combines qualitative

system and quantitative dimensions of manufacturing

performance measurement.

Carolyn J. Heinrich & Gerald Marschke (2010) did

research on “Incentives and their dynamics in public sector

PMS”. The findings were that the traditional form of

performance measurement system is dependent on scientific

management principles.

Kevin Murphy & Michael Olsen (2009) did research on

“Dimensions of high performance management system: An

exploratory study of the US casual restaurant segment”. The

findings were that seven work practices between

manufacturing work system and restraint work system.

Melek Eker & Semih Eker (2009) did an empirical analysis

of the association between the organizational culture and

performance measurement systems in Turkish manufacturing

sector. The findings of the study were that the firm with flexible

culture tend to use non financial performance measure, firm

with control use PMS for monitoring and legitimating.

Frank T. Gallo & James R Stokely (1988) did research on

“Positive cultural change at OSRAM SYLVANIA.” The

findings were that focused and well designed programs can

help to modify work culture in the desired direction.

Veronica Martinez & Mike kennerley (2010) did research

on “Impact of Performance measurement and management

system”. The findings were that various implementation

problems in the company, employees facing problem in

formulating their performance indicators, confusion and

anxiety among organizational member regarding new system.

A.K. Nabiha (2010) did research on “Performance

management system at Gas company”. The findings were that

various implementation problems in the company, employees

facing problem in formulating their performance indicators,

confusion and anxiety among organizational member

regarding new system.

RESEARCH METHODOLOGY

Objective

To determine the impact of work culture on performance

management system

Hypothesis

H0: Work culture has no impact on the performance

management system.

H1: Work culture has an impact on the performance

management system

Research designExploratory Research:

The objective of exploratory research is to gather

preliminary information that will help define problems and

suggest hypotheses. The results of exploratory research are not

usually useful for decision-making by themselves, but they

provide a significant insight into a given situation. The

questionnaire was designed to examine the impact of work

culture on the performance management system. Data was

analyzed via SPSS.

Sample design

The sample population comprises of employees working

in Ester Industries Ltd. Total 104 employees responded to the

questionnaire, which would be further used for the analysis.

The sampling would be representative sampling, where

all the employees at corporate office Gurgaon, are considered

on a probability basis, and from which information are

obtained and statistical inferences or predictions made about

the entire population within Ester Industries Ltd.

Data collection

The methodology used for the collection of data has been

divided into two groups:

1. Primary Data

2. Secondary Data

Primary Data

In this project the primary data was collected through

questionnaire method. A structured questionnaire was

administered and employees were asked to fill it. A total of 104

employees responded to the questionnaire.

Questionnaire

The tool OCTAPACE was used to measure the level of

agreement employees had with respect to 40 questionnaire

items, which represented potential factors that influence

employee’s perception about the culture of the organization.

The potential factors are:-

• Openness

• Confrontation

• Trust


• Authenticity

• Proaction

• Autonomy

• Collaboration

• Experimentation

The survey was designed to measure the level of

agreement employees had with respect to 28 questionnaire

items, which represented potential factors that influence

employee’s perception about performance management

system of the organization. The potential factors are:

• Benchmarking

• Goal setting

• Communication

• Feedback

• Transparency

• Developmental focus

Scale Used

Likert: type Scaling technique was used for the analysis

approach wherein a particular item is evaluated on the basis of

how well it discriminates by adopting favorable or unfavorable

attitude towards the given object. The respondent responded

in any of the following ways: -

• Strongly disagree

• Disagree

• Agree

• Strongly disagree

Secondary Data

Some data for this study was also collected from the

internet. The data collected was more for reference

DATA ANALYSIS AND INTREPETATION

Description of the survey and its analysis

The analysis of the information provided by the

employees is done on the basis of dimensions.

Here we can see that the mean of the parameter (openness)

is 3.40. Above table is showing that about 53% of the employees

who have responded to the questionnaire strongly agree to it

that the culture of the organization is open and around 36%

agree to it while only small number of employees disagrees to

it.

W1 W2 W3 W4 W5 W6 W7 W8

Mean 3.40 3.10 2.98 2.91 3.29 3.01 3.31 3.19

Std.

deviation

.730 .721 .653 .710 .707 .770 .739 .628

Table 1: Work Culture

Openness (W1)

Table 2: (a). Mean, S.D

Mean 3.40

Standard Deviation .730

Table 2: (b). Frequency (%)

Valid

Percent

Cumulative

Percent

Valid Strongly Disagree 1.9 1.9

Disagree 8.8 10.8

Agree 36.2 46.9

Strongly Agree 53.1 100.0

Total 100.0

Confrontation (W2)


Here we can see that mean of the parameter confrontation

has come out to be 3.10 which shows that most of the

employees agree that they face the problems rather than shying

away and they do deeper analysis of the interpersonal

problems while around 15% of employees disagree to it.

Mean 3.10


Table 3(b). Frequency (%)

Valid

Percent

Cumulative

Percent

Valid Strongly disagree 1.9 1.9

Disagree 15.4 17.3

Agree 52.7 70.0

Strongly agree 30.0 100.0

Total 100.0


Trust (W3)


Mean 2.98



Valid

Percent

Cumulative

Percent


Disagree 21.9 24.6

Agree 56.9 81.5


Total 100.0

Here we can see that mean of the parameter is 2.98 which

means most of the employees in the organization agree that

they offer moral support and help during crisis while around

19% of the employees disagree to it and feel that they can not

trust seniors while sharing confidential information.

Authenticity (W4)


Mean 2.91



Valid

Percent

Cumulative

Percent


Disagree 10.0 11.5

Agree 46.2 57.7


Total 100.0

The mean of the parameter authenticity is 2.91 which

mean most of the employees agree that congruity exists

between feelings and expressed behavior, own up the mistakes

made and believe that people are what they seem to be. Around

22% of the respondents disagree to it. They believe in

tactfulness and little manipulation to get the things done

Proaction (W5)


Mean 3.29



Valid

Percent

Cumulative

Percent


Disagree 18.8 20.0

Agree 60.8 80.8


Total 100.0

Here we can see that mean of the parameter is 3.29 which

show that most of the employees agree and believe in taking

initiative and preventive action and around 42% strongly agree

to it. While certain percentage of the employees who

responded to the questionnaire disagree to it that seniors

encourage them to think about development and take action in

that direction.

Autonomy (W6)


Mean 3.01



Valid

Percent

Cumulative

Percent


Disagree 13.8 18.8

Agree 55.8 74.6


Total 100.0


P1 P2 P3 P4 P5 P6

Mean 2.9154 3.3077 3.0615 3.1058 2.9327 2.9346

Std.

Deviation

.80494

.72247

.61144

.69999

.64025

.40177

Mean of the parameter collaboration is 3.31 which show

that most of the employees strongly agree to team work and

team spirit, appreciating help by others and believe in

performing immediate task rather than being concerned about

organizational goals while12% of the employees disagree to it.

Here mean of the parameter experimentation has come

out to be 3.19 which show that most of the employees who

responded to the questionnaire agree that they are encouraged

to take innovative approach to solve problems and to take fresh

look at how things are done and that they make genuine efforts

to change their behavior on the basis of the feedback received

and believe that stability is more important than

experimentation while some of the employees disagree to

trying out new ways of solving issues.

Description of the survey and its analysis

The analysis of the information provided by the

employees is done on the basis of dimensions

Collaboration (W7)


Mean 3.31


Valid

Percent

Cumulative

Percent

Valid Strongly Disagree 1.5 1.5

Disagree 11.9 13.5

Agree 40.4 53.8

Strongly Agree 46.2 100.0

Total 100.0

Benchmarking (P1)


Mean 2.19



Valid

Percent

Cumulative

Percent


Disagree 27.7 30.8

Agree 43.8 74.6


Total 100.0

Mean of the parameter autonomy is 3.01 which mean most

of the employees agree that they take independent action

relating to their job, are provided with close supervision of

action and believe that they should be given autonomy to plan

their own work. While small percentage of employees disagree

to it that freedom leads to indiscipline


Experimentation (W8)

Table 9 (a). Mean, S.D

Mean 3.19


Valid

Percent

Cumulative

Percent

Valid Strongly Disagree 11. 11.

Disagree 56.9 68.8

Agree

31.2

Strongly Agree

100.0

Total 100.0


Table 10: Performance Management System

Here we can see that the mean of the parameter

benchmarking has come out to be 2.19 which shows most of the

employees agree that benchmarking is done at the end of the

year, their rating is based on competencies and KRAs while

27% of the employees disagree to it


Goal Setting (P2)


Mean 3.30



Valid

Percent

Cumulative

Percent

Valid Disagree 15.4 15.4

Agree 38.5 53.8

Strongly Agree 46.2

Total 100.0 100.0

The mean of the parameter goal setting is 3.30. Around

46% of the employees strongly agree to it that goals are revised

and well defined. And 39% of the employees agree to it. While

small percentage of the employees disagree to it that goals are

mutually agreed upon

Communication (P3)


Mean 3.06



Here we can see that mean of the parameter

communication is 3.06 which means most of the employees

agree that managers helps them in getting clear idea, managers

interacts with them about their performance and the

communication process is such that they feel free to express

their disagreement regarding appraisal decision while around

11% of the employees disagree to it and feel that appraisal

system does not provide for free interaction between appraiser

and appraisee.

Feedback (P4)


Mean 3.10



Valid

Percent

Cumulative

Percent


Disagree 13.9 15.9

Agree 55.8 71.6

Strongly agree 28.4

100.0

Total 100.0

Here we can see that the mean of the parameter is 3.10

which show that most of the employees are satisfied with the

feedback system and agree to it that manager provide them

with feedback which helps them in improving their

performance and to know their weak areas. While small

percentage of employees disagree to it that they get proper

updates regarding their case.

Transparency (P5)


Mean 2.93



Valid

Percent

Cumulative

Percent


Disagree 11.2 12.7

Agree 66.9 79.6


Total 100.0

Valid

Percent

Cumulative

Percent


Agree 58.7 82.7

Strongly Agree 17.3

Total 100.0 100.0

Mean of the parameter transparency is 2.93. Most of the

employees agree to it that the appraisal system gives them an

idea of what is expected of them. While small percentage of

employees disagree to it that the appraiser is known, factors

against which they are rated are known and comments shared

by the appraiser are known to them.


Model R R Square

1 .175(a) .031

Table 18: Hypothesis

From the above table we can see that the value of R is .17

which indicates that there is low degree of correlation between

the independent variable (work culture) and the dependent

variable (performance management system). Value of R square

is .031 which indicates that work culture does not have strong

impact on the performance management system of the

organization. Even though 3.1% is a very small percentage but

the above results still affirm that there is an effect of work

culture on the performance management system. Thereby, the

research accepts the alternate hypothesis and rejects the null

hypothesis.

FINDINGS

• Employees at Ester Industries Ltd. Believe that the work

culture of the organization is open where free interaction

takes place amongst employees.

• Employees believe in facing the problem and doing

deeper analysis of the problem while 55% of the

employees feel that other employees pass their

responsibilities whenever there is a problem.

• Employees trust their colleagues but 30% of the employees

do not trust their manager while sharing confidential

information.

• Employees are authentic and they own up their mistakes.

Around 29% of employees believe in hiding unpleasant

truth.

• Employees believe in taking preventive action and

considering positive and negative aspects before taking

action.

• Employees are given freedom to plan their action and

work.70% of the employees feel that freedom leads to

indiscipline.

• 75% of employees perform immediate task rather than

being concerned about organizational goals. 85% of

employees believe that team work dilutes individual

accountability.

• 82% of employees try innovative ways of solving

problems.

• Appraisal is done at the end of the year.

• Performance goals are well defined and are revised based

on the changing needs of the organization. But around

31% of employees disagree to it that goals are mutually set.

• Manager assists employees in getting clear idea about the

task to be performed and often interact with them about

their performance. While 25% of the employees believe

that the appraisal system does not provide for frank

discussion between the appraiser and appraisee.

• Manager provides feedback to employees to help them

perform better and to make them aware of their weak

areas. Around 33% of the employees agree to it that they

do not get proper updates from HR regarding their case.

• Appraisal system is not transparent.33% of the employees

Here we can see that mean of the parameter

developmental focus is 2.93. Most of the employees agree to it

that job rotation is practiced to develop them; appraisal system

brings out training needs. While 12% of employees disagree to

it that training is provided to improve their performance.

Regression

Regression analysis is a statistical tool for the investigation

of relationships between variables. Usually, the investigator

seeks to ascertain the causal effect of one variable upon

another. For this I assumed work culture to be the independent

variable and performance management system to be the

dependent variable.

Developmental focus (P6)


Mean 2.93


a) Predictors: (Constant), work culture

b) dependent variable, PMS

As we can see in the table that value of R is .17, which

indicates a low degree of correlation. R Square explain how

much of dependent variable can be explained by independent

variable. In this case value of R square is .31 which means for

every 100% change in the independent variable work culture

3.1% change will occur in the dependent variable Performance

management system. Hence we can say that there is not a very

strong impact of work culture on the performance

management system.

Hypothesis

H0: Work culture has no impact on the performance

management system.

H1: Work culture has an impact on the performance

management system


Table 17: Model Summary

Valid

Percent

Cumulative

Percent


Agree 83.5 95.0

Strongly Agree 5.0

Total 100.0 100.0

Model R R Square

1 .175(a) .031


do not know who appraise them and 40% of the

employees are not provided with the comments shared by

the appraiser.

• Most of the employees agree to it that they are not

provided with the training and development programs to

overcome their shortcomings identified in the process.

• Value of R is .17 which indicates low degree of correlation

and value of R square is .31 which indicates that 3.1% of

the change in the dependent variable is caused by the

independent variable.

SUGGESTIONS

The organization can focus on improving the following:

• The company should encourage it employees to help other

employees during the time of crisis so that they don’t feel

left alone.

• Conduct weekly meetings between employees and

managers where employees get a chance to interact with

the manager. This will help in developing trust and

employees would be able to share information with the

manager without any fear.

• Managers should encourage employees to think about

their development and direct them in taking action.

• Employees should be encouraged to take up new ways of

solving problems.

• Company should conduct seminars and different

activities to develop team spirit amongst employees.

• HR should make ensure that the job description clearly

defines KRA’S.

• Employees should be involved in the process of goal

setting.

• HR should make sure that the employees get enough

feedback regarding their case.

• Transparency should be there in the PMS of the

organization. HR can ensure this by sharing comments

with employees regarding their performances, by letting

them know who is appraising them.

• Training should be provided to employees after

identifying their training needs so that they can overcome

their shortcomings.

CONCLUSION

The objective initially set out for the research was

achieved. Various parameters were studied for work culture

and performance management system. The relationship

between work culture and performance management system

was studied and the effect of the work culture on PMS was

found out to be 3.1% which is very less.

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21 Iss: 7, pp.836 – 853

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Gas Company. Journal of Asian case research, Jun2010,

vol. 14 Issue 1, p95-115, 21p

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management of manufacturing unit. International journal

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culture, change and emotions: A Qualitative study.

Journal of change management; Dec2009, Vol. 9 Issue 4,

p435-457, 23p

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Journal, Vol. 9 Iss: 1, pp.62 – 85


*Director, Dewan Institute of Management Studies, By-pass Road, Meerut, U.P. (India). Email: [email protected]

**Head-Management Program, Venketshwera Institute of Technology, Jatoli, Meerut (India). Email: [email protected]

***Head, Corporate Resource Centre, Llyod Institute of Management & Technology, Greater Noida (U.P.) INDIA. Email: [email protected]

INTRODUCTION

This business world is getting more competitive day by

day. Companies are facing of competition from their

competitors. So they are finding new ways to counter and

prove their superiority in the market. The customers’

expectations from the companies have also changed. They

want the companies from which they are purchasing the

products/services, to be more socially-responsible but the

thing is that they were giving much preference to the needs and

wants of the customers as compared to the societal well-being.

We can find many examples in the past were the companies

used to give big donations for supporting some social cause in

order of fulfill their social responsibility. With the

development of the marketing world, competition has

increased and customers’ expectations from the companies

have also changed. Big corporate houses are finding new ways

to stood up to this expectation level. One of the ways through

which they are trying to present themselves as a Socially

Responsible company is Cause Related Marketing (CRM).

Linking themselves to good causes has become attractive to

many businesses, especially those engaged in dealings with

consumers (Till & Nowaks, 2000). These associations can

influence perceptions regarding the corporation and,

consequently, have an effect on how consumers evaluate

products or services offered by the organization (Brown &

Dacin, 1997).

In this scenario, Cause Related Marketing [CRM] is means

of demonstrating an organization’s social commitment. CRM

evolved as a marketing strategy utilized by business to form a

partnership for mutual benefit with a non-commercial or

charity organization or a good cause (Pringle & Thompson,

1996). Since the beginning of CRM in the early 1980’s, the

number of alliances between for-profits and non-profits has

been steadily increasing (Adkins, 2000). The constant growth

in this area as a result of the positive experience of

organizations in their CRM programmes.

It was American Express that first coined the term “Cause

Related Marketing” in 1983. That year they launched a three-

month marketing program around the Statue of Liberty

As the business organizations are a part of the society,

company’s accountability and responsibility is not only

towards their shareholders but now it is said that as these

organizations take input from the society they should also give

something in return to the society. Now a day’s companies are

finding new ways to discharge their corporate social

responsibility and cause-related Marketing (CRM) is one of

them. Cause related marketing is a communication tool for

increasing customer loyalty and building reputation. Today,

the emergence of cause marketing programs has heralded a

dramatic shift in nonprofit-for-profit relationships. It has

established the concept that community development and

support could be positioned at the intersection of business

objectives (sales/profits) and societal needs. Supporting a

specific cause and being public about this support gives

companies identifiable personalities, demonstrates what they

stand for and helps them connect with customers, suppliers,

investors, employees and the community. Cause marketing

programs allow the consumers to overtly and publicly express

their belief in and support for the causes that are most

important to them.

This study is an attempt to understand consumer’s

perceptions regarding Cause Related Marketing (CRM). The

research findings were based on a surveys of 200 consumers in

Faridabad (NCR) and secondary data. The research aim was

focused on the consumer’s exception of the alliance between

commercial and non-commercial organizations. The research

found that consumers have a better perception of firms that

work with charities and good causes than those that do not.

They believe that the partnership between corporations and

charities has an impact on the good of society. However, they

are aware that commercial organizations themselves benefit

from this partnership. Concerning good causes, consumers

prefer to support those related to children. We noticed that an

individual connection with a cause might have considerable

influence on consumer attitudes and behavior in relation to a

specific cause.

Keywords: Cause related marketing, commercial

organization, Non-commercial organizations, Corporate

social responsibility.

An Emprical Study on People’s Perception ofBenefit of Cause Related Marketing to Commercial and Non Commercial Organisations

Dr. P.K. Agarwal*Dr. Mani Kansal**Mr. A.K. Tyagi***

Restoration Project. The objective was to increase card use and

new card applications and at the same time raise money,

awareness and support for the nonprofit Restoration Fund.

American Expenses donated one cent for every card

transaction and one dollar for every new card application. It

backed the program with a $4 million advertising campaign

aimed at reaching existing customers and drawing new ones.

The results were impressive, in just three months, the

Restoration Funds raised over $ 1.7 million. American Express

Card usage rose 27% and new card applications rose by 45%

compared to the previous year. Simultaneously, this program

also increased the use of credit cards by 28% garnering

considerable media coverage and free publicity (Adkins, 2000;

Kolter and Keller, 2006). It was a fitting outcome to a well

planned strategic effort. A clear demonstration that causes

marketing could achieve strategic goals by linking a for-profit

organization to a cause and enabling its consumers to

financially support the cause by doing business with the for

profit organization. From that initial entry into the consumer

mind space, cause marketing programs have evolved into

firmly established practice to be adopted by marketers. The

success of this campaign gave birth to the concept that “doing

good is good for business”.

The compulsions to use cause marketing have been

brought into sharp focus by the studies done by cone Inc., a

marketing communications agency that has been tracking

Americans utilities, towards corporate support of social issues.

According to the 2004 cone corporate citizenship study, 8 in 10

Americans say that corporate support of causes wins their trust

in that company, a 21% increase since 1997. A more significant

finding of the report is the response to the statement, “I am

likely to switch from one brand to another that is about the

same in price and quality, if the other brand is associated with a

cause”. A staggering 86% confirmed that they would do so, a

rise from 81% in October 2001. ‘Cause’, has therefore become

an important differentiator, a means to promote products and

enhance bottom lines for marketers today. According to the

IEG Sponsorship Report, Chicago, US spending on cause

Marketing will hit $1.34 billion in 2006 as compare to $120

million in 1990.

CRM strategies have helped corporations enhance their

reputation and corporate images, strengthen ties with

employees and increase sales and profits (Adkins, 2000; Kotler,

2003; Pringle & Thompson, 1999). The organizations are not

alone in reaping profit through financial gains and support.

Furthermore, CRM programmes give free publicity .PR and

public awareness not only to the cause but also to the for profit

organization.

In India, FMCG Companies like P & G, Unilever, Nestle,

ITC, Tata salt and Aircel in the telecom sector have used the

CRM strategy as a tactical marketing tool to enhance the sales

and to differentiate themselves in the market place. Based on

the divergent consumer attitude towards CRM, it is anticipated

that these companies might not be effective in achieving their

objectives.

CAUSE RELATED MARKETING (CRM)

Cause marketing or cause-related marketing refers to a

type of marketing involving the cooperative efforts of a “for

profit” business and non-profit organization for mutual

benefit. The term is sometimes used more broadly and

generally to refer to any type of marketing effort for social and

other charitable causes, including in-house marketing efforts

by non-profit organizations. Cause marketing differs from

corporate giving philanthropy as the latter generally involves a

specific donation that is tax deductable while cause marketing

is a marketing relationship generally not based on a donation.

Being the pioneers in the field, Varadarajan and Menon

defined CRM comprehensively as “the process of formulating

and implementing marketing activities that are characterized

by an offer from the firm to contribute a specified amount to a

designated cause when customers engage in revenue-

providing exchanges that satisfy organizational and

individual objectives”. Introducing the aspect of worthless,

Skory, Repka and Mcinst stated that “Cause Related Marketing

is simply marketing with a worthy cause”.

Expanding the previous definition by characterizing the

firms offer as a ‘promise’ having relationship implications,

Brink stated that “CRM (Cause related marketing) is a

specified marketing activity in which the firm promises its

consumers to donate company resources to a worthy cause for

each sold product or service.” Synthesizing these three

definitions, we can summarize CRM as: The process of

formulating and implementing marketing activities that are

characterized by a promise of the firm to donate company

resources to a worthy cause for each sold product or service

satisfying organizational and individual objectives.

Drumwriht (1994) stated that through CRM the company

can increase its sales and market share, motivate its employees,

improve its corporate and brand image and generate positive

publicity. Adkins (2000) postulated that CRM is not

philanthropy, which expects nothing in return. From her point

of view it is merely good business for both non-profit and for-

profit organizations, CRM alliances should be a relationship of

mutual benefit for the corporation, for the charity and for the

cause. For the corporation, the benefits include an increase in

brand awareness or even increased corporate profits. For the

cause, the benefit comes in the form of increased contributions

and generating more awareness. Furthermore, Pringle and

Thompson (1999) perceive CRM as a marketing tool that

associates a corporation with a cause for the benefit of both.

This can come about through a relationship with a charity or by

directly addressing the cause. We can associate the rising

consumer social awareness with the growth of CRM actions as

consumers are purchasing products as a demonstration of their

own social consciousness.

WHY CAUSE MARKETING? / BENEFITS OF CRM TO ORGANISATIONS AND CUSTOMERS

The term “cause related marketing” and “cause

marketing” continued to grow in usage. In more recent years

An Emprical Study on People’s Perception of Benefit of Cause Related Marketing to ..... 33

the term has come to describe a wider variety of marketing

initiatives based on the cooperative efforts of business and

charitable causes. This concept is beneficial for both the parties.

On the one hand, the campaign helps the corporate houses (for

profit organizations) in improving their company image,

building customer loyalty and increasing sales, whereas on the

other hand, it provides funds to the charity which is working to

support a special cause.

In the view of Adkins, CRM is defined as a win-win-win

situation, providing a win for the charity or cause, a win for the

customer and a win for the business. In a competitive market

‘survival’ of the ‘fittest’ theory prevails and only those

organizations can survive long, that are able to build long-term

relationships with customers. Customers being a part of

society expect companies to go beyond their call of duty.

The most notable benefits for the corporation take place

inside the corporation itself, concerning staff in the form of

improved employee morale (Drumwright, 1996; Polonsky &

Wood, 2001) and loyalty (Wragg, 1994). With increased staff

motivation, CRM can make employees more enthusiastic

about their jobs and constitutes a powerful internal marketing

tool.

According to Kotler, 2003; Mason, 2002, Polonsky &

Wood, 2001, CRM can improve the corporation image.

Andreasen (1996) believes that the non-profit image can define

or enhance the corporate image. But CRM is not a solution for a

damaged reputation. It is however, a way to strengthen the

strongest brands. It appears to be a new way of adding value to

brands so as to satisfy growing consumer demands for

demonstrations of social commitment (Pringle & Thompson,

1990). CRM programmes offer free publicity and PR while

increasing sales and profits (Adkins, 2000; Mason, 2002;

Polonsky & Wood, 2001; Pringle & Thompson, 1999;

Wood,1998) and also enhance customer loyalty (Kotler, 2003).

Corporations receive the added benefit of having access to

customers, employees, trustees and donors from non-profit

organizations (Andreasen, 1996). Sargeant (1999) suggests that

CRM has switched the emphasis on what business can do for a

charity to an equal focus on what charity can do for business.

According to Pringle & Thompson 1999; Polonsky & wood

2001; consumer also gain from CRM, as purchasing a product

or service benefits a charity or cause. Thus, the consumers can

either contribute to the society, giving him/her a feeling of

satisfaction for doing some good consumers can either

contribute to the society in which they live and work or be the

direct beneficiary of the cause.

Cause marketing allows a company to put its brand,

marketing might and people behind a nonprofit cause that can

provide mutual benefits to the company and the nonprofit

entity. The cause marketing campaigns can vary in their scope

and design, the types of nonprofit partners and the nature of

the relationships among the companies and their nonprofit

partners. In the most common type of relationship, for each

purchase made by its customers during a specified period of

time, a portion of it is donated to the nonprofit entity. It is a win-

win situation all around. Companies increase their sales, while

nonprofit organizations get more funds and the consumer

benefits because he feels a part of his purchase is going for a

good cause.

OBJECTIVES OF THE RESEARCH

In an effort to gain new insight into the effect of CRM on

consumer perception in India, this study examines the impact

of alliance between commercial (for profit) and non

commercial (non-profit organization) is perceived among the

200 customers of Ghaziabad (adjacent to Delhi, Capital of

India). Objectives of this research paper can listed as follows:-

• To gain insight about concept of CRM and its benefits to

organizations and customers through secondary data.

• To find out the people’s perception of CRM initiatives

implemented by organizations.

• To find out the CRM areas in which organizations are

perceived as good social citizens.

• To find out the reactions of people about CRM initiative

through open ended questions.

• To explore the benefits of CRM to for profit and for non-

profit organizations.

HYPOTHESIS

There is an association between age group and perception

of public regarding association of commercial (for profit)

organization with non-commercial (charity) organization. It

means that age group and perception of people are

independent variables.

RESEARCH METHOLOGY (QUESTIONNAIRE, SAMPLE AND DATA COLLECTION METHOD)

The focus of this research was on consumer perceptions.

Therefore a consumer survey was conducted in order to

examine how the alliance between for-profit and non-profit

organizations is perceived among the 200 customers of

Ghaziabad (adjacent to Delhi Capital of India). The

questionnaire utilized by the research started with a simple

introduction explaining the objective of research, its nature and

inviting the respondent’s cooperation. The questionnaire was a

mix of the two main types of questions; open-ended questions

and closed questions. An open-ended question requested

personal answers whereas in closed ended questions the

response was limited regarding the depth of response.

The research utilized quota sampling is a kind of judgment

sampling in which selection in controlled to some extent with

regard to gender age etc. Thus, from a sample of 200 customers,

48% were male and 52% were female. In the same way, 1/3 of

the population was aged between 20 and 29, and 2/3 were

between the ages of 29 and 59.

The questionnaire was applied in personal, face-to-face

interviews. Thus, primary data was gathered directly from

each respondent.


FINDINGS AND DATA ANALYSIS

One close ended question in the questionnaire was “Can

you rate that charities and working for good cause work for

profit organization?” Response to this answer can be

summarized by the following table:-

The above graph states that 47% of the people replied that

non-profit organization receives financial assistance, 17% said

that profit as well as non-profit organization benefit with the

alliance, 16.5% said that it increases awareness for the cause as

well as for the organization. 10% of the respondent even stated

that it is immoral on the part of the profit organization to

exploit charities.

In response to the question, “Which of the causes would

you like to support most”, the responses can be summarized by

the following graph:

Age

Group

Very good

idea Good

idea Poor

idea Very poor

idea Total

20-29 12

18.2%

19

48.5%

32

28.8%

3

4.5%

66

100%

30-59 29 83 17 5 134

21.6% 61.9% 12.7% 3.7% 100%

Total

Average

41 115 36 8 200

20.5% 57.5% 18.0% 4.0% 100%

Table shows that according to 20.5% of respondents, it is

very good idea of profit organizations work for societal cause.

57.5% said it is a good idea. 18% said it as a poor idea and 4%

said it as a very poor idea. No statistical difference between

male and female genders opinion was found. Research

demonstrated that the respondents between age group 20-29

near about 33% consideration it as a poor idea or very poor idea

while in age group of 30-59 only 16.4% of the respondents

stated it poor idea or a very poor idea.

Findings were tested applying chi-square test as follows:-

Now calculating the expected values (E):

∑∑−=

i ji

ii

E

EOx 2

Age /

Response

A very

good idea

A good

idea

A Poor

idea

A very

poor idea

20-29 14 38 12 3

30-59 27 77 24 5

Calculating:2X =7.96

Degree of freedom =(c-1) (r-1)

= 3

Level of significance (Q) =.052Table value of x = 7.813

2Here we see that table value of x is 7.81 which is less than 3

the calculated value i.e. 7.96. Hence, our hypothesis is rejected.

It means that age group and people’s perception are

dependent. Hence, it means that the people’s perceptions

change with the age group.

In response to another question “Give the reason for your

opinion about the response given to the previous question”.

The findings can be summarized by the following graphs:

The above graph states that the good cause respondents

most want to support is related to children followed by health

and poverty.

In the questionnaire in answer to an open ended question

regarding the link between profit organizations and non-profit

organizations was a good or very good idea, the respondents

quoted as follows:

• An organization can improve its image and the charity can

An Emprical Study on People’s Perception of Benefit of Cause Related Marketing to ..... 35

get the money.

• Because the organizations just want to increase their

profits, it’s good way for organizations to give money to

charities and good causes.

• Makes for a better/more equal society.

• Just a little f the money goes to charity.

• Consumers will have good impressions of the

organization so they can sell more products.

• Brings a positive image to the organization

In answer to open ended question,” Do you believe that

Cause Related Marketing activities are beneficial to the non-

profit organization”, the respondents stated that Cause

Related Marketing activities are beneficial to the non-profit

organization also. This was based on evidence that 78% of the

consumers understand that partnership between for-profit

and non-profit organizations is good for the non-profits. They

justified this principally by the fact that charities receive

financial assistance and enhance cause awareness.

Interestingly, 76% of the respondents said that they bought

products/ service linked with charities and good cause

primarily to help to the charities.

RECOMMENDATIONS AND SUGGESTIONS

Based on the main findings of the research, we suggest the

following recommendations and suggestions for the

organizations:

• Organizations should monitor the results obtained by

charities and good causes and advertise too vigorously to

achieve more credibility for Organizations in the

perception of the consumers.

• Organizations should inform consumers as to what

percentage of the product price is earmarked for the

charity. Regarding voucher schemes, consumers should

be informed as to how many are necessary for the benefits

to be received. Such actions reinforce the credibility of

CRM programmes.

• Organizations should affiliate themselves with a good

cause or charity in a long-term partnership. This helps to

demonstrate a true commitment to the cause or charity.

• Organizations should invest in communication

campaigns focusing on younger consumers (20 to 29 years

of age), demonstrating that Organizations can be both

profitable and ethical. In fact, bigger Organizations can

make larger donations.

• Organizations should select charities or good causes that

are related to their business activities and with which their

consumers can work. Higher affinity between commercial

Organizations (for profit) and non-commercial

Organizations (non-profits) will generate better results for

both.

EPILOGUE

This study found that consumers have a better perception

of firms that work with charities and good causes. However,

they are aware that Organizations themselves benefit from this

partnership. They also consider that the partnership between

corporations and charities contributes to society, and believe

this contribution could be higher categorizing it currently as

having a merely medium impact.

According to our findings, we can conclude that the

majority of consumers view interaction between for-profit and

non-profit Organizations in a positive way. Therefore, we can

affirm that through the CRM Programs, corporations can

obtain benefits related to reputation and image, which are

considered valuable assets. Non-profit Organizations can also

obtain benefits when they receive financial or technological

resources, among others, and with those resources they can

contribute to the improvement of the society. Therefore, the

interaction between for-profit and non-profit Organizations

through CRM programs can create competitive advantage and

benefits to all those involved, including society.

REFERENCES

• Till , B. D., & Nowak, L. I., “Towards effective use of cause-

related marketing alliances”, The Journal of Product & Brand

Management, 2000.

• Drumwright, M.E., “Society responsible Organizational

buying environmental buying as a noneconomic buying

criteria”, Journal of Marketing, 1994.

• Brown, T.J., & Dacin, P.A.,”The company and the product:

corporate associations and consumer product responses”,

Journal of Marketing, 1997.

• Kotler, P., “Marketing Management”, 2006, 12th Edition,

Prentice-Hall.

• Pringle. H., & Thompson, M., “Brand spirit how cause related

marketing builds brands”, Jhon Wiley & Sons, 1999.

• Mason, T., “Good causes deliver for brands:do corporations

gains from being socially responsible?’ Marketing, 2002.

• Adkins, S., “Cause related marketing: who cares wins”, Oxford,

2000.

• Pringle. H., & Thompson, M., “Brand spirit how cause related

marketing builds brands”, Jhon Wiley & Sons, 1999.

• Sargeant, A., “Marketing Management for nonprofit

organization”. Oxford University Press, 1999.

• Wragg, D., “The effective use of sponsorship”, Kongan Page,

1994.

• www.en.wikipedia.org/wiki/cause_marketing

• www.timesfoundation.indiatimes.com


*Assistant Professor, PSG Institute of Management, PSG College of Technology, Coimbatore. Email: [email protected]

INTRODUCTION

Financial System is the most important institutional and

functional vehicle for economic transformation of any country.

Banking sector is reckoned as a hub and barometer of the

financial system. As a pillar of the economy, this sector plays a

predominant role in the economic development of the country.

The global financial system is still far away from a full recovery

on account of a slowdown in the US economy as well as the

Euro debt crisis. However, the Indian banking sector has been

relatively well shielded by the central bank and has managed

to sail through most of the crisis with relative ease. India’s

banking sector is growing rapidly and is expected to enjoy even

greater growth opportunities in the future. The growth in the

Indian Banking Industry has been more qualitative than

quantitative and it is expected to remain the same in the coming

years.

The last decade has seen many positive developments in

the Indian banking sector. The policy makers, which comprise

the Reserve Bank of India (RBI), Ministry of Finance and

related government and financial sector regulatory entities,

have made several notable efforts to improve regulation in the

sector. The sector now compares favourably with banking

sectors in the region on metrics like growth, profitability and

non-performing assets (NPAs). A few banks have established

an outstanding track record of innovation, growth and value

creation. This is reflected in their market valuation. However,

improved regulations, innovation, growth and value creation

in the sector remain limited to a small part of it. The cost of

banking intermediation in India is higher and bank penetration

is far lower than in other markets. India’s banking industry

must strengthen itself significantly if it has to support the

modern and vibrant economy which India aspires to be. While

the onus for this change lies mainly with bank managements,

an enabling policy and regulatory framework will also be

critical to their success.

Recent time has witnessed the world economy develop

serious difficulties in terms of lapse of banking & financial

institutions and plunging demand. Prospects became very

uncertain causing recession in major economies. However,

This paper aims to study the implementation of the Credit

Risk Management Framework by various Commercial Banks

operating at Coimbatore region. A primary survey was

conducted to analyse the credit risk management practises at

the banks. The results show that the authority for approval of

Credit Risk vests with the ‘Board of Directors’ and the ‘Credit

Policy Committee’. For Credit Risk Management, most of the

banks (if not all) are found performing several activities like

industry study, periodic credit calls, periodic plant visits,

developing MIS, risk scoring and annual review of accounts.

However, the banks are not that much efficient in the use of

derivatives products as risk hedging tool. This survey has

analysed the Credit Risk Management framework of banks and

reports that the credit risk management framework is on the

right track and it is fully based on the RBI’s guidelines issued

in this regard.

Keywords: Credit risk, interbank exposures, loan policy,

pricing credit risk, credit policy.

A Study on The Credit Risk ManagementFramework at Banks in Coimbatore Region P. Varadharajan*

amidst all this chaos India’s banking sector has been amongst

the few to maintain resilience. Several Indian banks are

pursuing global strategies, as Indian companies globalise and

people of Indian origin increase their investment in India. At

the same time, a large number of global banks have stepped up

their focus on India, keen to participate in the sector’s growth.

Need for the study:

The sound financial systems serve as an important

channel for achieving economic growth through the

mobilization of financial savings. The failure to respond to

changing market realities has stunted the development of the

financial sector in many developing countries. A weak banking

structure has been unable to fuel continued growth, which has

harmed the long-term health of their economies. The major

factors that contributed to deteriorating bank performance are

stringent regulatory requirements, low interest rates charged

on government bonds, directed and concessional lending. One

of the problems that have been identified as a cause of the

current credit crunch is the financial industry’s over-reliance

on complex quantitative models of financial risk and the wide

use of risk management tools such as Value at Risk (VAR). The

VAR has been treated as reliable even when it was evident that

not all uncertainties in the risk model had been sufficiently

accounted for, and this hassled to an underestimation of

extreme risk. Now-a-days, a huge focus has been placed on

credit risk modelling in the banking industry with the advent

of Basel II. The major issue for the banks is the implementation

of the new credit risk management framework as per RBI and

Basel directives. This study focuses on investigating the

implementation and effectiveness of credit risk management

framework that is practised at banks in Coimbatore to reduce

the threat of defaulters.

Objectives:

• To study the implementation of the Credit Risk

Management Framework at banks in Coimbatore.

• To measure the level of risk faced by banks in their

transactions.

• To identify the most frequently used approach for

measuring the capital requirement for credit risk.

• To study about the importance of the aspects of credit risk

considered for defining the prudential limits.

• To identify the importance of factors those are considered

for pricing credit risk and evaluating the interbank

exposures.

• To investigate about the approving authorities for the

credit risk policy and loan policy of the banks.


Altman (2000), in this article he has used the Altman Z-

Score model and ZETA credit risk model to examine the unique

characteristics of business failures. Finally he has specified and

quantified the variables that are the effective indicators and

predictors of corporate distress. Monoshree Mahanta and

Munindra Kakati (2011) have made their attempts to analyse

the various measures for effective management of credit risk

that are implemented by the Indian Public sector banks to test

their effectiveness. By their analyses they have concluded that

all the model have weakness but the level of weakness is not the

same for all the models. This weakness is coined as the major

cause of accounts turning into bad loans. Mitchell and Roy

(2007) have used the Altman Z-Score model to rank the firms

and to design their internal rating systems. Through this article

they have investigated whether some models are better in

differentiating defaulting and non-defaulting firms and

founded the extent to which different failure prediction models

may yield significantly different rankings for the same firm.

Vytautas Boguslauskas, RicardasMileris, RutaAdlyte (2011)

have investigated the credit risk assessment model by using 25

variables which has the highest correlation to the possibility of

default. By using the analysis of variance (ANOVA) and

Logistic regression the reliability of the model was tested.

Finally Mahalanobis Distances were calculated and it was

concluded that the average values of Mahalanobis Distances

for the most reliable companies were the lowest and these

values increased with a decreased reliability of the company.

Rajagopal (1996) has made an attempt to overview the bank’s

risk management and has suggested a model for pricing the

products based on credit risk assessment of the borrowers. He

has concluded that a good banking is the one having a good

risk management, which will lead to the profitable survival of

the institution. In the long run, the interests of the banking

institution will be safeguarded only by having a proper

approach to risk identification, measurement and control.

Marcelo Y. Takami and Benjamin M. Tabak (2011) have

proposed a methodological framework to construct an early

warning system for the Banking sector. They have employed

an options-based methodology to estimate default risk for six

major Brazilian banks and proved that the measures have

informational content. Finally the options-based indicator was

compared with market-based financial fragility indicators and

it was observed that the indicators are useful for risk managers

and regulators, especially during crisis. By this article they

have concluded that the option-based methods are preferable

for classify the banks. Froot and Stein (1998) have found that

credit risk management through active loan purchase and sales

activity affects the bank’s investments in risky loans. Banks

that purchase and sell loans hold more risky loans as a

percentage of the balance sheet than other banks. It is been

concluded that the banks that manage their credit risk hold

more risky loans than banks that merely sell loans or banks

that merely buy loans. Gabriele Sabato (2010) has analysed the

history and new developments related to credit scoring models

and has found that with the New Basel Capital Accord, credit

scoring models have been remotivated and given

unprecedented significance. He has also analysed the key steps

of the credit scoring model’s lifecycle highlighting the main

requirements imposed by Basel II and has concluded that the

banks that are willing to implement the most advanced

approach to calculate their capital requirements under Basel II

should increase their attention and consideration of credit

scoring models in the near future. Bandyopadhyay (2006) aims

at developing an early warning signal model for predicting

corporate default in emerging market economy like India. He

has presented the method for directly estimating probability of

default using financial and non-financial variable. For

predicting corporate bond default multiple discriminant

analysis is used and logistic regressions model is employed for


A Study on The Credit Risk Management Framework at Banks in Coimbatore Region 39

estimating Probability of Default (PD). The author concludes

that by the usage of ‘Z’ score model, banks and investors in

emerging markets like India can get early warning signals

about the firm’s solvency status and reassess the magnitude of

default premium that is required for a low grade securities.

Duffee and Zhou (1999) have modelled the effects on banks

due to the introduction of a market for credit derivatives;

particularly, credit-default swaps. Their paper examined that a

bank can use swaps to temporarily transfer credit risks of their

loans to others, reducing the likelihood that defaulting loans

trigger the bank’s financial distress. They have concluded that

the introduction of a credit derivatives market is not desirable

because it can cause other markets to break down because of

loan risk-sharing. Jayanta Kishore Nandiand Navin Kumar

Choudhary (2011) have developed an internal credit rating

model for the banks to improve their current predictive power

of financial risk factors. He also has studied banks technique of

assessing the creditworthiness of their borrowers and how can

they identify the potential defaulters so as to improve their

credit evaluation. He has used the Altman Z-Score model to

arrive at an equation for helping the banks in predicting the

future defaulters and taking necessary action. The authors

have concluded by developing a model which is an application

of multivariate discriminant analysis in credit risk modelling.

Treacy and Carey (1998) have examined the credit risk rating

mechanism at US Banks and highlighted the architecture of the

Bank’s Internal Rating System and Operating Design of rating

system to compare the bank system relative to the rating

agency system. Finally they have concluded that the bank’s

internal rating system helps in their credit risk management,

profitability analysis and product pricing. Han-Hsing Lee,

Ren-Raw Chen and Cheng-Few Lee (2009) have reviewed the

empirical evidence and estimation methods of structural credit

risk models and have provided the investigation of the

performance of default prediction under the down-and-out

barrier option framework. Through their analyses they have

concluded that the simple Merton model outperforms the

Brockman and Turtle model in default prediction and the

inferior performance of the Brockman and Turtle model may

be due to its unreasonable assumption of the flat barrier.

Suresh N, Anil Kumar S. and Gowda D. M (2009), have

analysed the relationship of diversified portfolio of credit

advances and NPAs of private banks. The portfolios of all

credit advances in all regions were considered for the study. It

has been found that the relationship between overall NPAs of

private sector banks had no correlation with that of individual

Bank and portfolios of occupations plays significant role

towards contribution of NPAs. Personal loans are inversely

proportional to the NPAs and are significant in all regions.

Thus they conclude that the banks need to diversify their

portfolio to achieve a better credit equilibrium and establish

Risk Management Information System. Muninarayanappa

and Nirmala (2004) have outlined the concept of credit risk

management in banks and they have highlighted the objectives

and factors that determine the direction of bank’s policies on

credit risk management. The challenges related to internal and

external factors in credit risk management are also examined

and concluded that the success of credit risk management

require maintenance of proper credit risk environment, credit

strategy and policies. Thus the ultimate aim should be to

protect and improve the loan quality. Robert Edelstein's (1977)

examines the role of banks in financing the development of

Black-owned businesses.' The key issue discussed in this article

was "how does a bank differentiate between potentially good

and potentially bad credit risks". Through the empirical

analysis he has suggested some variables that may be useful for

screening the credit worthiness of loan applications from Black

entrepreneurs. He has concluded by interpreting the loan size

as an indicator of loan soundness. Sébastien Deschênes,

examines the loan loss estimation management by bank

managers by analysing the potential opportunistic behaviours

exhibited by the commercial loan officers at the time of loan. He

has concluded that the role of the commercial loan officers in

files involving businesses in financial difficulty can be

explored by the usage of loan loss estimation management.

Methodology

The research involved in this study is a descriptive

research. Descriptive research design is involved for observing

and describing the behavior of a subject without influencing it

in any way. This study aims at identifying the variables

influencing the credit risk management framework and its

effectiveness in reducing the default risk. There are two types

of data involved in this project viz. primary and secondary

data. Primary data refers to the information collected from

various banks by means of the questionnaire. Conversely,

secondary data refers to the information gathered from the

existing sources like the report, literature articles etc. This

study includes both types of data. Initially, the information was

gathered from the literature articles to gain knowledge about

the research area. The research articles were taken from the full

text databases such as EBSCO Host and ProQuest that are

highly reliable. By analysing these articles sufficient

knowledge about the banking industry, credit risk

management and the variables influencing its effectiveness

were gained. The sample size is 35. This sample size consists of

the 21 public sector banks, 12 private banks and 2 foreign

banks. Percentage Analysis, One way Anova Analysis were

used.

ANALYSIS AND DISCUSSION

Level of Risk:

The first question raised to bankers was about the relative

importance of various transactions, which cause credit risk in

their bank. The average value of the risk levels are given below

Table 1.1: Level of risk faced by banksin their transactions

Transactions Public Sector Banks

Private Sector Banks

Overall risk of banks

Score Level Score Level Score Level

Direct lending 4.3 Normal 3.67 Normal 4 Normal

Guarantees/LOC

4 Normal 2.92 Very low 3.41 low

Cross border exposure

4.2 Normal 3.92 Normal 4.09 Normal

From the above table, it is seen that at public sector banks

‘direct lending’ has the highest risk level (with mean score 4.3)

followed by ‘Cross border exposure’ (mean score 4.2) and

‘guarantees/letter of credit’(mean score 4). In private sector

banks, ‘Cross border exposure’ has the highest risk level (with

mean score 3.92) followed by ‘direct lending’ (mean score 3.67)

and ‘guarantees/letter of credit’ (mean score 2.92). As a whole,

‘Cross border exposure’ has the highest risk level (with mean

score 4.09) followed by ‘direct lending’ (mean score 4) and

‘guarantees/letter of credit’ (mean score 3.41).

Effectiveness of Securitization Ordinance Act 2002:

Next the effectiveness of ‘Securitization Ordinance Act,

2002’was analysed because it was introduced for the effective

credit risk management at banks in India.


This analysis is to find the limits at which the approval is

required from the Credit Approval Authority.

The survey resulted that the 83% (29 out of 35) of the banks

view that ‘Securitization Ordinance’ is very important for

banks in their credit risk management and 17% (6 out of 35)

view that, the act will be of ‘somewhat’ helpful in dealing with

credit risk. None of the banks responded that the act was not at

all helpful for managing their credit risk.

Responsibility of approval of Credit risk policy:

Next, the delegation of authority to approve the credit risk

policy was analysed to identify the authority to approve the

credit risk policies in the banks.

From the above it can be witnessed that mostly ‘board of

directors’ were allotted to approve the credit risk policies,

followed by the ‘credit policy committee’ and the ‘senior

management’.

Credit limit for seeking approval from credit approval committee:

From the above table, it is seen that majority (34%) of the

banks have set-up their approving committees at the head

office level. 23% of the banks have set-up their approving

committees at the branch level, 23% at the Zonal level and 20%

has set-up their approving committees at the regional level.

Aspects of credit risk considered for prudential limits:

Table 1.2: Effectiveness ofSecuritization Ordinance Act 2002

Levels of effectiveness

Public Sector Banks


Overall

Very much 16 (76%) 13 (93%) 29 (83%)

Somewhat 5 (24%) 1 (7%) 6 (17%)

Not at all 0 (0%) 0 (0%) 0 (0%)

Total 21 14 35

Table 1.3: Responsibility ofapproval of Credit risk policy

Authority Public Sector Banks


Overall

Board of Directors

12 (57%) 5 (36%) 17 (49%)

Senior Management

4 (19%) 2 (14%) 6 (17%)

Credit policy committee

5 (24%) 7 (50%) 12 (34%)

Total 21 14 35

Table 1.4: Credit limit for seeking approvalfrom credit approval committee

Credit limit Public Sector Banks


Overall

Above 20 lakhs 6 (29%) 1 (7%) 7 (20%)

Above 50 lakhs 7 (33%) 6(43%) 13 (37%)

Above 1 crore 8 (38%) 7 (50%) 15 (43%)

Total 21 14 35

The above table shows that about 43% of the banks have

implemented ‘Above 1 crore’ as their credit limit and then 34%

of the banks have implemented ‘Above 50 lakhs’ as their credit

limit and 20% of the banks have implemented ‘Above 20 lakhs’

as their credit limit.

Level at which the approval committees are set-up:

Banks can have credit approving committees at various

operating levels. Hence the analysis was made to find the levels

at which these committees were functioning.

Table 1.5: Level at which theapproval committees are set-up

Level Public Sector Banks


Overall

Branch level

5 24% 3 21% 8 23%

Regional level

5 24% 2 14% 7 20%

Zonal level

4 19% 4 29% 8 23%

Head office level

7 33% 5 36% 12 34%

Total 21 100% 14 100% 35 100%

41A Study on The Credit Risk Management Framework at Banks in Coimbatore Region

From the above table it is seen that ‘Stipulated benchmark

for ratios’ is considered as the most important aspect and the

second most important aspect is the ‘Exposure limits’. Next

important one is the ‘Maximum exposure limit’ aspect

followed by ‘Single/Group borrower limit’ and the ‘Maturity

profile for loan book’ aspect.

Metrics for Bank’s rating:

‘Risk rating’ is given the maximum importance as a credit

risk management activities amongst the commercial banks,

irrespective of their sector or size.

From the above table, it is seen that the factor ‘value of

collateral’ with the mean of 6 holds the first position the in

terms of importance in pricing credit risk. Portfolio quality

with the mean of 5.91, holds the second importance position

followed by Future business potential (with mean of 5.59),

Portfolio industry exposure (with mean of 5.56), strategic

reasons (with mean of 5.47), Market forces (with mean of 5.35)

and Perceived value of accounts (with mean of 5.24).

Responsibility for reviewing the loan policy:

Table 1.6: Aspects of credit risk considered for defining prudential limits

Aspects Score App Score Status

Stipulate Benchmark 6.35 6 Important

Single/Group borrower limits 6.03 6 Important

Exposure limits 6.18 6 Important

Max exposure limits 6.06 6 Important

Maturity profile 5.41 5 Moderate

Table 1.7: Metrics for Bank’s rating

Metrics for rating

Public Sector Banks


Overall

Number 5 24% 5 36% 10 29%

Alphabets 1 5% 1 7% 2 6%

Alpha-Numeric

13 62% 6 43% 19 54%

Symbol 0 0% 0 0% 0 0%

Descriptive terms

2 10% 2 14% 4 11%

Total 21 100% 14 100% 35 100%

From the above table, at the overall level it is seen that the

highest percentage of banks use alpha-numeric (54%) followed

by those uses numbers (29%), descriptive terms (11%) and

alphabets (6%).

Factors considered for pricing credit risks:

Table 1.8: Factors considered for pricing credit risks

Factors Score App Score Status

Portfolio quality 5.91 6 Important

Value of Collateral 6.00 6 Important

Market forces 5.35 5 Moderate

Perceived value of accounts

5.24 5 Moderate

Future Business Potential

5.59 6 Important

Portfolio Industry Exposure

5.56 6 Important

Strategic reasons 5.47 5 Moderate

Table 1.9: Responsibility for reviewing the loan policy

Authority Public Sector Banks


Overall

Board of Directors

16 76% 6 43% 22 63%

Credit Administration

department

4 19% 4 29% 8 23%

Loan Review Officer

1 5% 0 0% 1 3%

Any other 0 0% 4 29% 4 11%

Total 21 100% 14 100% 35 100%

From the above table, it can be witnessed that mostly

‘board of directors’ (63%) were authorised to review the loan

policies, followed by the ‘credit administration department’

and the ‘Loan officer’. Some the banks (11%) allow other

officials to involve in reviewing the loan policy based on their

experience and designation.

Aspects considered for studying interbank exposures:

Table 1.10: Aspects considered for studying interbank exposures

Factors Score App Score Status

Study of financial performance

6.38 6 Important

Operating efficiency 6.15 6 Important

Management quality 5.94 6 Important

Past experience 5.94 6 Important

Bank rating on credit quality

6.21 6 Important

Internal matrix for counterparty risk

5.32 5 Moderate

From the above table, it is seen that the factor ‘Study of

financial performance’ with the mean of 6.38 holds the first

position the in terms of importance in studying interbank

exposures. Bank rating on credit quality with the mean of 6.21,

holds the second importance position followed by operating

efficiency (with mean of 6.15), Management quality and past

experience (with the same mean of 5.94) and the internal matrix

for counterparty risk (with mean of 5.32).

Approach for capital charge collection:

From the above table, it is seen that the ‘Standardised

approach’ is the most frequently used 51%) approach for

calculating the capital charge. The second most frequently

used approach is the Advanced internal rating approach (37%)

followed by the foundation internal rating based approach

(11%).

Analysis: One-Way AnovaLevel of credit risk VsResponsibility for approval of

credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee, the level of approval committee and the activities of credit risk management.

H0: Level of credit risk does not influence the

responsibility for approval of credit risk policy,

technique/instrument used for credit risk management, credit

limit for seeking credit approval committee, level of approval

committee and the activities of credit risk management.

H1: Level of credit risk influences the responsibility for

approval of credit risk policy, technique/instrument used for

credit risk management, credit limit for seeking credit

approval committee, level of approval committee and the

activities of credit risk management.


From the table showing the level of risk, it is seen that the

significant values of Direct lending, Guarantees/Letter of

credit, Cross border exposure against the responsibility for

approval of credit risk policy are 0.697, 0.268 & 0.486, which is

greater than 0.05 (5% level of significance), the alternate

hypothesis is rejected. The significant values of Direct lending,

Guarantees/Letter of credit, Cross border exposure against the

technique/instrument used for credit risk management are

0.789, 0.108 & 0.190, which is greater than 0.05 (5% level of

significance), the alternate hypothesis is rejected. The


credit, Cross border exposure against the credit limit for

seeking credit approval committee are 0.171, 0.827 & 0.919,

which is greater than 0.05 (5% level of significance), the

alternate hypothesis is rejected. The significant values of Direct

lending, Guarantees/Letter of credit, Cross border exposure

against the level of approval committee are 0.863, 0.45 & 0.273,




against the activities of credit risk management are 0.725, 0.551

& 0.559, which is greater than 0.05 (5% level of significance), the

alternate hypothesis is rejected. Hence, there is no significant

association between the responsibilities for approval of credit

risk policy, technique/instrument used for credit risk

management, credit limit for seeking credit approval

committee, the level of approval committee, the activities of

credit risk management and level of credit risk measuring

variables.

Level of credit risk Vs Metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.

H0: Level of credit risk does not influence the metrics used

for rating, interval for credit risk assessment, preparation of

credit quality reports, Risk Adjusted Return on Capital

(RAROC), credit risk model for the evaluation of credit

portfolio and the interval for loan policy.

H1: Level of credit risk influences the metrics used for

rating, interval for credit risk assessment, preparation of credit

quality reports, Risk Adjusted Return on Capital (RAROC),

credit risk model for the evaluation of credit portfolio and the

interval for loan policy.

Table 1.11: Approach for capitalcharge collection

Approach Public Sector Banks


Overall

Standardized Approach

11 52% 7 50% 18 51%

Foundation Internal Rating Based Approach

3 14% 1 7% 4 11%

Advanced Internal Rating Based Approach

7 33% 6 43% 13 37%

Total 21 100% 14 100% 35 100%

Table 2.1: Level of credit risk and the responsibility for approval of credit risk policy,

technique/instrument used for credit risk management, credit limit for seeking credit

approval committee, level of approval committee and the activities of

credit risk management

Responsibility for approvalof CRP

Technique used for

CRM

Credit limit Level of approval committee

Activities of CRM

F

Sig.

F

Sig.

F

Sig.

F Sig.

F

Sig.

Direct .555 .697 .668 .789 1.867 .171 .448 .863 .702 .725

Guarantees/ LOC

1.37 .268 1.832 .108 .191 .827 1.004 .450 .904 .551

Cross border

exposure

.882

.486

1.534

.190

.085

.919

1.335

.273

.894 .559

Lending

*Level of Significance is 5%




credit, Cross border exposure against the metrics used for

rating in the bankare 0.981, 0.868 & 0.253, which is greater than

0.05 (5% level of significance), the alternate hypothesis is

rejected. The significant values of Direct lending,

Guarantees/Letter of credit, Cross border exposure against the

interval for credit risk assessment are 0.125, 0.238 & 0.747,




against the preparation for credit quality reports are 0.438,

0.105 & 0.429, which is greater than 0.05 (5% level of



credit, Cross border exposure against RAROC are 0.872, 0.983

& 0.355, which is greater than 0.05 (5% level of significance), the



against credit risk model for the evaluation of credit portfolio

are 0.435, 0.971 & 0.62, which is greater than 0.05 (5% level of



credit, Cross border exposure against the interval for loan

policy are 0.855, 0.389 & 0.498, which is greater than 0.05 (5%

Table 2.2: Level of credit risk and the metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC),

credit risk model for the evaluation of credit portfolio and the interval for loan policy.


level of significance), the alternate hypothesis is rejected.

Hence, there is no significant association between the metrics

used for rating, interval for credit risk assessment, preparation

of credit quality reports, Risk Adjusted Return on Capital


portfolio and the interval for loan policy and the level of credit

risk measuring variables.

Level of credit risk Vsthe reviewer of loan policy,defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.

H0: Level of credit risk does not influence the reviewer of

loan policy, defined exposure for managing off-balance sheet

exposure, interbank exposure framework, use of derivatives

and the approach for measuring capital requirement for credit

risk.

H1: Level of credit risk influences the reviewer of loan

policy, defined exposure for managing off-balance sheet



risk.

Metrics for rating

Interval for CRA

credit quality reports

RAROC Credit risk model

Interval for loan policy

F Sig. F Sig. F Sig. F Sig. F Sig. F Sig.

Direct Lending .101 .981 2.217 .125 .616 .438 .026 .872 1.027 .435 .331 .855

Guarantees/ LOC

.311 .868 1.503 .238 2.776 .105 .000 .983 .240 .971 1.069 .389


1.416 .253 .294 .747 .642 .429 .880 .355 .767 .620 .862 .498

Table 2.3: Level of credit risk and the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the

approach for measuring capital requirement for credit risk

Reviewer of loan policy

Defined exposure

Interbank exposure

Use of derivatives

Approach for measuring capital

F Sig. F Sig. F Sig. F Sig. F Sig.

Direct Lending .996 .407 .032 .859 1.416 .257 .153 .858 3.278 .024

Guarantees/ LOC

.307 .820 .561 .459 3.575 .040 .521 .599 1.313 .288


1.051 .384 .052 .822 .545 .585 .422 .659 1.042 .402




credit, Cross border exposure against the reviewer of loan

policy are 0.407, 0.82 & 0.384, which is greater than 0.05 (5%

level of significance), the alternate hypothesis is rejected. The


credit, Cross border exposure against defined exposure for

managing off-balance sheet exposure are 0.859, 0.459 & 0.822,



lending, Cross border exposure against interbank exposure

framework are 0.257 & 0.585, which is greater than 0.05 (5%

level of significance), but the variable Guarantees/Letter of

credit has a significant value of 0.04 which is less than 0.05 (5%

level of significance), so the null hypothesis is rejected. The


credit, Cross border exposure against the use of derivatives are



significant values of Guarantees/Letter of credit, Cross border

exposure against the approach for measuring capital

requirement for credit risk are 0.288 & 0.402, which is greater

than 0.05 (5% level of significance), but the variable Direct

lending has a significant value of 0.024 which is less than 0.05

(5% level of significance), so the null hypothesis is rejected.


Hence, there is significant association between the interbank

exposure framework, approach for measuring capital

requirement for credit risk and the level of credit risk

measuring variables.

Effectiveness of Securitization Ordinance Act 2002 VsResponsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee, the level of approval committee and the activities of credit risk management.

H0: Effectiveness of Securitization Ordinance Act 2002

does not influence the responsibility for approval of credit risk

policy, technique/instrument used for credit risk

management, credit limit for seeking credit approval

committee, level of approval committee and the activities of

credit risk management.


influences the responsibility for approval of credit risk policy,




Table 2.4: Effectiveness of Securitization Ordinance Act 2002 and the responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit

for seeking credit approval committee, level of approval committee and the activities of credit risk management


Responsibility for approval of CRP

Technique used for CRM


Activities of CRM


Effectiveness of Securitization Ordinance Act 2002

1.697

.177

.532

.895

1.829

.177

.963

.477

.984

.488

From the above table, it is seen that the significant values

of the responsibility for approval of credit risk policy, the


limit for seeking credit approval committee, the level of

approval committee and activities of credit risk management

are 0.171, 0.895, 0.177, 0.477 & 0.488, which is greater than 0.05

(5% level of significance), the alternate hypothesis is rejected.

Hence, there is no significant association between the

responsibilities for approval of credit risk policy,


limit for seeking credit approval committee, the level of

approval committee, the activities of credit risk management

and effectiveness of Securitization Ordinance Act 2002.

Effectiveness of Securitization Ordinance Act 2002 Vs Metrics used for rating, interval for credit risk assessment,

preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.


does not influence the metrics used for rating, interval for

credit risk assessment, preparation of credit quality reports,

Risk Adjusted Return on Capital (RAROC), credit risk model

for the evaluation of credit portfolio and the interval for loan

policy.


influences the metrics used for rating, interval for credit risk

assessment, preparation of credit quality reports, Risk

Adjusted Return on Capital (RAROC), credit risk model for the

evaluation of credit portfolio and the interval for loan policy.

Metrics for rating

Interval for CRA






1.411

.254

1.068

.356

.776

.385

.011

.915

.228

.975

3.443

.020



of Effectiveness of Securitization Ordinance Act 2002 against

the metrics used for rating in the bank, the interval for credit

risk assessment, the preparation for credit quality reports,

credit risk model for the evaluation of credit portfolio are 0.254,

0.356, 0.385, 0.915 & 0.975 which is greater than 0.05 (5% level of


significant values of Effectiveness of Securitization Ordinance

Act 2002 against the interval for loan policy is 0.020, which is

lesser than 0.05 (5% level of significance), the null hypothesis is

rejected. Hence, there is significant association between the

interval for loan policy and the effectiveness of Securitization

Ordinance Act 2002.

Effectiveness of Securitization Ordinance Act 2002 Vs the reviewer of loan policy, defined exposure for managing

Table 2.5: Effectiveness of Securitization Ordinance Act 2002 and the metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted

Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.


off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.


does not influence the reviewer of loan policy, defined

exposure for managing off-balance sheet exposure, interbank

exposure framework, use of derivatives and the approach for

measuring capital requirement for credit risk.


influences the reviewer of loan policy, defined exposure for

managing off-balance sheet exposure, interbank exposure

framework, use of derivatives and the approach for measuring

capital requirement for credit risk.

Table 2.6: Effectiveness of Securitization Ordinance Act 2002 and the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework,

use of derivatives and the approach for measuring capital requirement for credit risk



Defined exposure

Interbank exposure

Use of derivatives




1.852 .158 .776 .385 .284 .754 .303 .741 .542 .706


of Effectiveness of Securitization Ordinance Act 2002 against

the reviewer of loan policy, defined exposure for managing off-

balance sheet exposure, interbank exposure framework, use of

derivatives, approach for measuring capital requirement for

credit risk are 0.158, 0.385, 0.754, 0.741 & 0.706, which is greater

than 0.05 (5% level of significance), so the alternate hypothesis

is rejected. Hence, there is significant association between the

interbank exposure framework, approach for measuring

capital requirement for credit risk and the effectiveness of

Securitization Ordinance Act 2002.

Aspects of credit risk Vs Responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval

committee, the level of approval committee and the activities of credit risk management.

H0: Aspects of credit risk does not influence the





H1: Aspects of credit risk influences the responsibility for



approval committee, level of approval committee and the

activities of credit risk management.


significant values of Stipulated benchmark for ratios,

Single/Group borrower limits, Exposure limits, Maximum

exposure limits to industry and Maturity profile of loan book

against the responsibility for approval of credit risk policy are

0.915, 0.862, 0.956, 0.71 & 0.829, which is greater than 0.05 (5%





against the technique/instrument used for credit risk

management are 0.772, 0.941, 0.961, 0.558 & 0.794, which is


hypothesis is rejected. The significant values of Stipulated

benchmark for ratios, Single/Group borrower limits, Exposure

limits, Maximum exposure limits to industry and Maturity

profile of loan book against the credit limit for seeking credit

approval committee are 0.982, 0.521, 0.105, 0.506 & 0.117, which

is greater than 0.05 (5% level of significance), the alternate




profile of loan book against the level of approval committee are






Table 2.7: Aspects of credit risk and the responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee,

level of approval committee and the activities of credit risk management


against the activities of credit risk management are 0.241, 0.198,


significance), the alternate hypothesis is rejected. Hence, there

is no significant association between the responsibilities for



approval committee, the level of approval committee, the

activities of credit risk management, aspects of credit risk

measuring variables and the aspects of credit risk.

Aspects of credit risk Vs Metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.

H0: Aspects of credit risk does not influence the metrics





H1: Aspects of credit risk influences the metrics used for

rating, interval for credit risk assessment, preparation of credit

quality reports, Risk Adjusted Return on Capital (RAROC),

credit risk model for the evaluation of credit portfolio and the

interval for loan policy.

Table 2.8: Aspects of credit risk and the metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model

for the evaluation of credit portfolio and the interval for loan policy.





Activities of CRM


Stipulate Benchmark .237 .915 .688 .772 .018 .982 .341 .928 1.394 .241

Single/Group borrower limits

.320 .862 .454 .941 .665 .521 .302 .947 1.500 .198

Exposure limits .162 .956 .409 .961 2.425 .105 1.720 .146 .850 .596

Max exposure limits .537 .710 .926 .558 .696 .506 1.555 .192 .871 .578

Maturity profile .368 .829 .662 .794 2.299 .117 1.033 .431 1.291 .290

Metrics for rating

Interval for CRA





Stipulate Benchmark

1.642 .190 .759 .477 1.178 .286 1.752 .195 .870 .542 .244 .911


2.559 .059 .308 .737 .166 .686 1.398 .246 1.283 .296 .246 .910

Exposure limits 1.078 .385 .085 .919 1.509 .228 .058 .811 .904 .518 .633 .643

Max exposure limits

.946 .451 1.632 .211 .038 .846 2.547 .120 2.059 .084 .801 .534

Maturity profile .231 .919 .397 .676 .587 .449 1.092 .304 1.301 .287 .533 .713







against the metrics used for rating in the bankare 0.19, 0.059,






against the interval for credit risk assessment are 0.477, 0.737,






against the preparation for credit quality reports are 0.195,

0.246, 0.811, 0.12 & 0.304, which is greater than 0.05 (5% level of





against RAROC are 0.286, 0.686, 0.228, 0.846 & 0.449, which is





profile of loan book against credit risk model for the evaluation

of credit portfolio are 0.542,0.296, 0.518, 0.084 & 0.533, which is





profile of loan book against the interval for loan policy are

0.911, 0.91, 0.643,0.534 & 0.713, which is greater than 0.05 (5%






portfolio and the interval for loan policy and the Aspects of

credit risk measuring variables.

Aspects of credit risk Vsthe reviewer of loan policy,defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.

H0: Aspects of credit risk does not influence the reviewer

of loan policy, defined exposure for managing off-balance

sheet exposure, interbank exposure framework, use of

derivatives and the approach for measuring capital

requirement for credit risk.

H1: Aspects of credit risk influences the reviewer of loan

policy, defined exposure for managing off-balance sheet



risk.

Table 2.9: Aspects of credit risk and the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and

the approach for measuring capital requirement for credit risk



Defined exposure

Interbank exposure

Use of derivatives



Stipulate Benchmark

.567 .641 2.022 .164 .135 .874 .474 .627 8.699 .000


.372 .773 7.258 .011 .625 .542 1.008 .376 6.144 .001

Exposure limits .330 .804 .491 .488 .257 .775 3.582 .039 1.439 .245

Max exposure limits

1.359 .273 1.693 .202 .159 .854 3.117 .058 3.816 .013

Maturity profile 4.198 .013 4.275 .047 .881 .424 .611 .549 .877 .489



Single/Group borrower limits, Exposure limits and Maximum

exposure limits to industry against the reviewer of loan policy

are 0.641, 0.773, 0.804 & 0.273, which is greater than 0.05 (5%

level of significance), but the maturity profile of loan book has a

significant value of 0.013 which is lesser than 0.05 (5% level of

significance), the null hypothesis is rejected. The significant

values of Stipulated benchmark for ratios, Single/Group

borrower limits, Exposure limits, Maximum exposure limits to

industry against defined exposure for managing off-balance

sheet exposure are 0.164, 0.488 & 0.202, which is greater than

0.05 (5% level of significance), but the variables Single/Group

borrower limit and the maturity profile of loan book has a

significant value of 0.011 &0.047 which is lesser than 0.05 (5%

level of significance), the null hypothesis is rejected. The




against interbank exposure framework are 0.874, 0.542, 0.775,

0,.854 & 0.424, which is greater than 0.05 (5% level of

significance), so the alternate hypothesis is rejected. The


Single/Group borrower limits, Maximum exposure limits to

industry and Maturity profile of loan book against the use of

derivatives are 0.627, 0.376, 0.058 & 0.549, which is greater than

0.05 (5% level of significance), but the variable Exposure limits

has a significant value of 0.039 which is less than 0.05 (5% level

of significance), so the null hypothesis is rejected. The

significant values of Exposure limits and Maturity profile of

loan book against the approach for measuring capital

requirement for credit risk are 0.245 & 0.489, which is greater

than 0.05 (5% level of significance), but the variables Stipulated

benchmark for ratios, Single/Group borrower limits,

Maximum exposure limits to industry has a significant value of

0.00, 0.001& 0.013, which is less than 0.05 (5% level of

significance), so the null hypothesis is rejected. Hence, there is

significant association between the reviewer of loan policy,

defined exposure for managing off-balance sheet exposure, use

of derivatives, the approach for measuring capital requirement

for credit risk and the aspects of credit risk measuring

variables.

Factors for pricing credit risk VsResponsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee, the level of approval committee and the activities of credit risk management.

H0: Factors for pricing credit risk does not influence the





H1: Factors for pricing credit risk influences the





Table 2.10: Factors for pricing credit risk and the responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit

approval committee, level of approval committee and the activities of credit risk management






Activities of CRM


Portfolio quality 2.166 .097 1.301 .293 .969 .391 .334 .931 2.652 .023

Value of Collateral .229 .920 3.552 .006 .515 .602 1.040 .427 .437 .922

Market forces .297 .878 .820 .653 .674 .517 1.612 .175 1.958 .084


.468 .758 1.023 .478 .313 .733 .708 .665 1.396 .240


1.161 .348 .663 .793 .018 .982 .400 .894 1.050 .438


.667 .620 1.035 .468 1.054 .360 .705 .668 1.934 .088

Strategic reasons .861 .499 .571 .867 .791 .462 .721 .655 .856 .592


significant values of Portfolio quality, Value of collateral,

Market forces, Perceived value of accounts, Future Business

Potential, Portfolio industry exposure and strategic reasons


0.097, 0.92, 0.878, 0.758, 0.348, 0.62 & 0.499, which is greater

than 0.05 (5% level of significance), the alternate hypothesis is

rejected. The significant values of Portfolio quality, Market

forces, Perceived value of accounts, Future Business Potential,

Portfolio industry exposure and strategic reasons against the

technique/instrument used for credit risk management are

0.293, 0.653, 0.478, 0.793, 0.468 & 0.867, which is greater than

0.05 (5% level of significance), but Value of collateral has a

significant value of 0.006 which is less than 0.05 (5% level of

significance), the null hypothesis is rejected. The significant

values of Portfolio quality, Value of collateral, Market forces,

Perceived value of accounts, Future Business Potential,

Portfolio industry exposure and strategic reasons against the

credit limit for seeking credit approval committee are 0.391,

0.602, 0.517, 0.733, 0.982, 0.36 & 0.462, which is greater than 0.05


The significant values of Portfolio quality, Value of collateral,



against the level of approval committee are 0.931, 0.427,0.175,

0.665, 0.894, 0.668 & 0.655, which is greater than 0.05 (5% level

of significance), the alternate hypothesis is rejected. The







significance), but the variable stipulated benchmark for ratios

has a significant value of 0.023 which is less than 0.05 (5% level

of significance), the null hypothesis is rejected. Hence, there is

significant association between the technique/instrument

used for credit risk management, activities of credit risk

management and factors for pricing credit risk.

Factors for pricing credit risk VsMetrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.

H0: Factors for pricing credit riskdoes not influence the

metrics used for rating, interval for credit risk assessment,

preparation of credit quality reports, Risk Adjusted Return on

Capital (RAROC), credit risk model for the evaluation of credit


H1: Factors for pricing credit risk influences the metrics





Table 2.11: Factors for pricing credit risk and the metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC),






Potential and Portfolio industry exposure against the metrics

used for rating in the bankare 0.538, 0.386, 0.561, 0.331, 0.173 &

0.180, which is greater than 0.05 (5% level of significance), but

the variable strategic reasons has a significant value of 0.023,

which is lesser than 0.05 (5% level of significance), the null

hypothesis is rejected. The significant values of Portfolio

quality, Value of collateral, Market forces, Perceived value of

accounts, Future Business Potential, Portfolio industry

exposure and strategic reasons against the interval for credit

risk assessment are 0.279, 0.363, 0.171, 0.201, 0.416, 0.330 &

0.548, which is greater than 0.05 (5% level of significance), the

alternate hypothesis is rejected. The significant values of

Portfolio quality, Value of collateral, Market forces, Perceived

value of accounts, Future Business Potential, and strategic

reasons against the preparation for credit quality reports are

0.104, 0.385, 0.081, 0.617, 0.167 & 0.874, which is greater than

0.05 (5% level of significance), but the variable Portfolio

industry exposure has a significant value of 0.048, which is less

than 0.05 (5% level of significance), the null hypothesis is

rejected. The significant values of Value of collateral, Perceived

value of accounts, Future Business Potential against RAROC

are 0.324, 0.18 & 0.815, which is greater than 0.05 (5% level of

significance), but the variables Portfolio quality, Market forces,

Portfolio industry exposure and strategic reasons has a

significant value of 0.034, 0.00, 0.016 & 0.011, which is less than

0.05 (5% level of significance), the null hypothesis is rejected.





are 0.658,0.848, 0.15, 0.108, 0.708, 0.115 & 0.642, which is greater

than 0.05 (5% level of significance), the alternate hypothesis is

rejected. The significant values of Portfolio quality, Value of

collateral, Market forces, Perceived value of accounts, Future

Business Potential, Portfolio industry exposure and strategic

reasons against the interval for loan policy are 0.458, 0.277,


Metrics for rating

Interval for CRA





Portfolio quality .795 .538 1.328 .279 2.788 .104 4.898 .034 .717 .658 .933 .458

Value of Collateral

1.076 .386 1.045 .363 .776 .385 1.004 .324 .469 .848 1.343 .277

Market forces .757 .561 1.865 .171 3.238 .081 17.021 .000 1.704 .150 .935 .457


1.200 .331 1.687 .201 .255 .617 1.873 .180 1.904 .108 .323 .860


1.715 .173 .902 .416 1.999 .167 .055 .815 .654 .708 .283 .887


1.685 .180 1.148 .330 4.231 .048 6.395 .016 1.868 .115 .787 .543

Strategic reasons 3.337 .023 .613 .548 .026 .874 7.341 .011 .739 .642 .666 .620


Hence, there is significant association between the metrics

used for rating, preparation of credit quality reports, Risk

Adjusted Return on Capital (RAROC), the interval for loan

policy and the factors for pricing credit risk.

Factors for pricing credit risk Vsthe reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.

H0: Factors for pricing credit risk does not influence the

reviewer of loan policy, defined exposure for managing off-




H1: Factors for pricing credit risk influences the reviewer

of loan policy, defined exposure for managing off-balance

sheet exposure, interbank exposure framework, use of



Table 2.12: Factors for pricing credit risk and the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for

measuring capital requirement for credit risk




significant values of the variables Value of collateral,

Perceived value of accounts, Future Business Potential and

strategic reasons against the reviewer of loan policy are 0.571,


significance), but Portfolio quality, Market forces, Portfolio

industry exposure has a significant value of 0.012, 0.005 &

0.013, which is lesser than 0.05 (5% level of significance), the

null hypothesis is rejected. The significant values of Value of

collateral, Perceived value of accounts, Future Business


against defined exposure for managing off-balance sheet

exposure are 0.578, 0.803, 0.859, 0.71 & 0.131, which is greater

than 0.05 (5% level of significance), but Portfolio quality,

Market forces has a significant value of 0.01 & 0.044, which is

lesser than 0.05 (5% level of significance), the null hypothesis is

rejected. The significant values of Portfolio quality, Value of

collateral, Market forces, Perceived value of accounts, Future

Business Potential, Portfolio industry exposure and strategic

reasons against interbank exposure framework are 0.635, 0.379,


level of significance), so the alternate hypothesis is rejected.




against the use of derivatives are 0.678, 0.572, 0.544, 0.694,


significance), so the alternate hypothesis is rejected. The


Market forces, Perceived value of accounts and Portfolio

industry exposure against the approach for measuring capital

requirement for credit risk are 0.334, 0.29, 0.176, 0.162 & 0.678,

which is greater than 0.05 (5% level of significance), but the

variables future business potential and strategic reasons has a

significant value of 0.007& 0.02, which is less than 0.05 (5% level

of significance), so the null hypothesis is rejected. Hence, there

is significant association between the reviewer of loan policy,

defined exposure for managing off-balance sheet exposure, the

approach for measuring capital requirement for credit risk and

the factors for pricing credit risk.

Aspects for evaluating bank wise exposure Vs Responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee, the level of approval committee and the activities of credit risk management.


Defined exposure

Interbank exposure

Use of derivatives



Portfolio quality 4.297 .012 7.428 .010 .460 .635 .393 .678 1.194 .334

Value of Collateral .680 .571 .316 .578 1.000 .379 .569 .572 1.306 .290

Market forces 5.155 .005 4.397 .044 1.198 .315 .620 .544 1.700 .176


1.437 .251 .063 .803 .538 .589 .370 .694 1.763 .162

Future Business

Potential

.773 .518 .032 .859 .950 .397 .110 .897 4.342 .007


4.228 .013 .141 .710 .654 .527 .099 .906 .582 .678

Strategic reasons 1.425 .254 2.396 .131 .557 .579 .139 .871 3.415 .020


H0: Aspects for evaluating bank wise exposure does not

influence the responsibility for approval of credit risk policy,




H1: Aspects for evaluating bank wise exposure influences

the responsibility for approval of credit risk policy,




Table 2.13: Aspects for evaluating bank wise exposure and the responsibility for approval of credit risk policy, technique/instrument used for credit risk management, credit limit for seeking credit approval committee,

level of approval committee and the activities of credit risk management



significant values of Study of financial performance, operating

efficiency, management quality, past experience, bank rating

on credit quality and internal matrix for counter party risk




The significant values of Study of financial performance,

operating efficiency, management quality, past experience,

bank rating on credit quality and internal matrix for counter

party risk against the technique/instrument used for credit

risk management are 0.771, 0.131, 0.276, 0.301, 0.516 & 0.413,


alternate hypothesis is rejected. The significant values of Study

of financial performance, operating efficiency, management

quality, past experience, bank rating on credit quality and

internal matrix for counter party risk against the credit limit for

seeking credit approval committee are 0.875, 0.740, 0.285, 0.547,






against the level of approval committee are 0.817, 0.675, 0.745,

0.45, 0.631, 0.387, which is greater than 0.05 (5% level of






0.241, 0.456, 0.949 & 0.621, which is greater than 0.05 (5% level

of significance), the alternate hypothesis is rejected. Hence,

there is no significant association between responsibility for



approval committee, level of approval committee, activities of

credit risk management and the aspects for evaluating

bankwise exposures.

Aspects for evaluating bank wise exposure Vs Metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC), credit risk model for the evaluation of credit portfolio and the interval for loan policy.


influence the metrics used for rating, interval for credit risk

assessment, preparation of credit quality reports, Risk

Adjusted Return on Capital (RAROC), credit risk model for the

evaluation of credit portfolio and the interval for loan policy.


the metrics used for rating, interval for credit risk assessment,

preparation of credit quality reports, Risk Adjusted Return on

Capital (RAROC), credit risk model for the evaluation of credit





Activities of CRM



.109 .979 .689 .771 .134 .875 .512 .817 .426 .928

Operating efficiency .086 .986 1.733 .131 .303 .740 .695 .675 .520 .870

Management quality .261 .900 1.333 .276 1.306 .285 .606 .745 1.394 .241

Past experience .247 .909 1.287 .301 .614 .547 1.004 .450 1.026 .456


.510 .729 .976 .516 .334 .718 .752 .631 .385 .949

Internal matrix .579 .680 1.109 .413 1.371 .268 1.107 .387 .821 .621





against the metrics used for rating in the bankare 0.905, 0.497,






against the interval for credit risk assessment are 0.808, 0.349,




efficiency, past experience, bank rating on credit quality and

internal matrix for counter party risk against the preparation

for credit quality reports are 0.947, 0.957, 0.856, 0.851 0.756,


variable management quality has a significant value of 0.032,

which is less than 0.05 (5% level of significance), the null

hypothesis is rejected. The significant values of Study of

financial performance, operating efficiency, management


internal matrix for counter party risk are 0.454, 0.255, 0.119,







are 0.937, 0.914, 0.119, 0.892, 0.815 & 0.41, which is greater than

0.05 (5% level of significance), the alternate hypothesis is

rejected. The significant values of Study of financial

performance, operating efficiency, management quality, past

experience, bank rating on credit quality and internal matrix

for counter party risk against the interval for loan policy are







portfolio, interval for loan policy and the Aspects for

evaluating bank wise exposure.

Aspects for evaluating bank wise exposure Vs the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.


influence the reviewer of loan policy, defined exposure for

managing off-balance sheet exposure, interbank exposure

framework, use of derivatives and the approach for measuring

capital requirement for credit risk.


the reviewer of loan policy, defined exposure for managing off-




Table 2.14: Aspects for evaluating bank wise exposure and the metrics used for rating, interval for credit risk assessment, preparation of credit quality reports, Risk Adjusted Return on Capital (RAROC),




Metrics for rating

Interval for CRA






.254 .905 .214 .808 .004 .947 .574 .454 .322 .937 .262 .900

Operating efficiency

.864 .497 1.089 .349 .003 .957 1.342 .255 .367 .914 .301 .875

Management quality

.793 .539 1.152 .329 5.028 .032 2.565 .119 1.848 .119 .413 .798

Past experience .327 .857 .107 .899 .033 .856 .027 .870 .404 .892 .782 .546

Bank rating on

credit quality

.338 .850 .789 .463 .036 .851 .047 .830 .515 .815 1.194 .334

Internal matrix .414 .797 .041 .960 .098 .756 1.970 .170 1.069 .410 .419 .793


Table 2.15: Aspects for evaluating bank wise exposure and the reviewer of loan policy, defined exposure for managing off-balance sheet exposure, interbank exposure framework, use

of derivatives and the approach for measuring capital requirement for credit risk




efficiency, past experience and bank rating on credit quality

against the reviewer of loan policy are 0.247, 0.263, 0.229 & 0.06,

which is greater than 0.05 (5% level of significance), but of

management quality and internal matrix for counter party risk

has a significant value of 0.01& 0.037, which is lesser than 0.05

(5% level of significance), the null hypothesis is rejected. The


efficiency, management quality, past experience and bank

rating on credit quality against defined exposure for managing

off-balance sheet exposure are 0.947, 0.389, 0.736, 0.468 & 0.415,


internal matrix for counter party risk has a significant value of

0.007, which is lesser than 0.05 (5% level of significance), the

null hypothesis is rejected. The significant values of Study of

financial performance, operating efficiency, management


internal matrix for counter party risk against interbank

exposure framework are 0.854, 0.78, 0.82, 0.745, 0.748 & 0.249,

which is greater than 0.05 (5% level of significance), so the

alternate hypothesis is rejected. The significant values of Study

of financial performance, operating efficiency, management


internal matrix for counter party risk against the use of

derivatives are 0.473, 0.844, 0.809, 0.342, 0.523 & 0.965, which is

greater than 0.05 (5% level of significance), so the alternate

hypothesis is rejected. The significant values of Study of

financial performance, management quality, past experience

and bank rating on credit quality against the approach for

measuring capital requirement for credit risk are 0.455, 0.866,


significance), but the variables operating efficiency and

internal matrix for counter party risk has a significant value of

0.001& 0.006, which is less than 0.05 (5% level of significance),

so the null hypothesis is rejected. Hence, there is significant

association between the reviewer of loan policy, defined

exposure for managing off-balance sheet exposure, the

approach for measuring capital requirement for credit risk and

the Aspects for evaluating bankwise exposure.

FINDINGS

In this research paper, an attempt has been made to study

the ‘Credit Risk Management Framework’ of banks operating

in Coimbatore. The findings are presented below:

• In public sector banks, ‘direct lending’ transaction has the

highest risk and in private sector banks the ‘cross border

exposures’ have the highest risk. While considering the

overall banking sector ‘cross border exposure’

transactions of the banks have the highest risk.

• To manage and control the credit risk, all the banks are

following the ‘Securitization Ordinance Act, 2002’ which

is very much effective for them.

• Regarding the authority for approval of the Credit Risk

Policy, it was found that in most of the banks, the same is

approved either by the Board of Directors or the Credit

approval committee.

• The authority of credit risk management is set up at ‘Head

Office’ level in most of the banks. The credit sanction of the

authority is obtained for exposures of more than Rs. 1 cr.

• For management of credit risk, RBI has suggested various

prudential limits like clear definition of exposure limits

and single/group borrower limits. Amongst these limits,

‘stipulated benchmark for ratios’ is considered as the most

important and the ‘maturity profile for loan book’ is

considered as the least.

• The risk rating is the most important activity performed by

banks for credit risk management. More than 50% of the

banks use the ‘Alpha-Numeric scale in their rating

mechanism.

• The next important technique for credit risk management,

as suggested by RBI, is ‘Risk adjusted pricing of the

portfolio’. Through the survey it was found that the ‘Value

of collateral’ is the most important factor considered for

pricing credit risk in banks.

• Regarding model for evaluation of their credit portfolio, it

was found that most of the banks use CRISIL’s model and

their own internally designed models for the effective

credit portfolio evaluation.


Defined exposure

Interbank exposure

Use of derivatives




1.452 .247 .004 .947 .159 .854 .766 .473 .938 .455

Operating efficiency

1.395 .263 .762 .389 .251 .780 .171 .844 5.825 .001

Management quality

7.386 .001 .116 .736 .200 .820 .213 .809 .314 .866

Past experience 1.520 .229 .540 .468 .297 .745 1.109 .342 1.193 .334


2.748 .060 .682 .415 .293 .748 .662 .523 .988 .429

Internal matrix 3.187 .037 8.423 .007 1.451 .249 .035 .965 4.502 .006

• Regarding the responsibility for reviewing the loan Policy,

it was found that in more than 60% of the banks, the Board

of Directors were responsible for the review.

• Inorder to evaluate the interbank exposures, the aspect

‘Study of Financial performance’ is considered as more

important and the aspect ‘Internal matrix about the

counter party risk’ is given the least importance.

• For calculating the capital charge, most of the banks prefer

either the standardized approach or the advanced internal

rating based approach of credit risk.

SUGGESTIONS

From the above findings, the following suggestions are

recommended.

• Through the effective use of RAROC and interbank

exposure framework the credit risk level of the banks can

be reduced.

• The appropriate selection of the approach for measuring

capital requirement will reduce the risk level of the banks

by improving the credit risk measures that are followed.

• Having a reliable interbank exposure framework the

effectiveness of the risk rating process can be improved.

• The interval for credit risk assessment should be in

correspondence with the interval for loan policy review.

• By defining the exposure for managing the off-balance

sheet exposures there will be consistency in the efficiency

of the credit risk management activities.

• To generate an effective credit quality report, the banks

should consider the effectiveness of both the Risk

Adjusted Return on Capital measurement and the

interbank exposure framework.

• Proper training/education program towards the

implementation of the credit risk management activities

will make the managers more efficient.

CONCLUSION

Thus the study has analysed the broad dimensions

associated with credit risk management practises at banks in

Coimbatore. Irrespective of the sector differences Credit Risk

Management framework at banks in the Coimbatore region are

on the right track and it is fully based on the RBI’s guidelines

issued. During the transaction activities like direct lending,

guarantees and cross border exposures, the interbank

exposure framework, RAROC and the approach for measuring

capital requirement plays a major role in reducing the credit

risk level. While the ‘risk rating’ is considered as the most

important instrument and the other instruments like proper

credit administration, prudential limits and loan review are

also used as very highly important instruments of credit risk

management. The efficient loan policy, defined exposure for

managing off-balance sheet exposure, use of derivatives and

the approach for measuring capital requirement for credit risk

have a major impact on the effectiveness of the credit risk

measuring variables, pricing credit risk and bank-wise

exposure evaluation. Stipulated benchmark and exposure

limits are major prudential limits for the credit risk

management. Risk pricing is a modern tool for pricing credit

risk in banks. However, the banks are not very effective in

using the derivatives products as risk hedging tools because

many banks have not adapted to it. The risk managers were of

the opinion that the implementation of credit risk related

guidelines was not a problem for them, but lack of the

understanding of the methodologies/instruments was a

cumbersome task for many of them. Hence, steps to organize

high training programs on risk management at some institute

of high credibility. To conclude the appropriate selection of the

approach for measuring capital requirement and the

consistency in its evaluation will make the banks to operate

safely at a low risk level.

REFERENCES

• Allen N. Berger, Adrian M. Cowan, And W. Scott Frame

(2009), “The Surprising Use Of Credit Scoring in Small

Business Lending by Community Banks and the Attendant

Effects On Credit Availability And Risk”, Federal Reserve Bank

of Atlanta Working Paper Series, 2009.

• Altman E (2000), “Predicting Financial Distress of Companies:

Revisiting the Z-Score and Zeta Models”, pp. 2-5.

• Bandyopadhyay Arindam (2006), “Predicting Probability of

Default of Indian Corporate Bonds: Logistic and Z-Score Model

Approaches”, The Journal of Risk Finance, Vol. 7, No.3, pp. 255-

272.

• Duffee Gregory R and Zhou Chunseng (1999), “Credit

Derivatives in Banking: Useful Tools for Managing Risk?”

Research Program in Finance – 289, University of California,

Berkeley.

• Ferguson Roger W (2001), “Credit Risk Management – Models

and Judgement”, PNB Monthly Review, Vol. 23, No. 10, pp. 23-

31.

• Froot Kenneth A and Jeremy C Stein (1998), “Risk

Management, Capital Budgeting, and Capital Structure Policy

for Financial Institutions: An Integrated Approach”, Journal of

Financial Economics, Vol. 47, pp. 55-82.

• Gabriele Sabato (2010), “Assessing the Quality of Retail

Customers: Credit Risk Scoring Models”, The IUP Journal of

Bank Management.

• Han-Hsing Lee, Ren-Raw Chen And Cheng-Few Lee (2009),

“Empirical Studies Of Structural Credit Risk Models And The

Application In Default Prediction: Review And New Evidence”,

International Journal of Information Technology & Decision

Making, Vol. 8, No. 4 (2009) 629–675.

• Jayanta Kishore Nandi and Navin Kumar Choudhary (2011),

“Credit Risk Management of Loan Portfolios by Indian Banks”,

The IUP Journal of Bank Management.

• Louberge Henri and Schlesinger Hanis (2005), “Coping with

Credit Risk”, The Journal of Risk Finance, Vol. 6, No. 2, pp. 118-

134.

• Marcelo Y. Takami and Benjamin M. Tabak (2011), “Prediction

of default risk: An options-based approach applied to the

Brazilian banking sector” Journal of Banking Regulation (2011)

12, 167–179.

• Mitchell J and Roy V P (2007), “Failure Prediction Models:

Performance, Disagreements, and Internal Rating Systems”,

pp. 3-5, NBB Working Paper No. 23.

• MonoshreeMahanta and MunindraKakati (2011),

“Effectiveness of Internal Rating Systems in Public Sector

Banks of India”, The IUP Journal of Bank Management.


A Study on The Credit Risk Management Framework at Banks in Coimbatore Region 55

• Muninarayanappa and Nirmala (2004), “Credit Risk

Management in Banks – Key Issues”, Journal of Accounting &

Finance, Vol. 18, No. 1, pp. 94-98.

• Rajagopal S (1996), “Bank Risk Management – A Risk Pricing

Model”, SBI Monthly Review, Vol. 35, No. 11, pp. 553-567.

• Robert Edelstein (1977), “Analysis of a Commercial Bank

Minority Lending Program”, IME Journal Of Finance, Vol

Xxxii, No, 5th December 1977.

• Sébastien Deschênes, “Loan Loss Estimation Management by

Financial Institution Managers and Commercial Loan

Officers”, Journal of Performance Management.

• Suresh N, Anil Kumar S. and Gowda D. M (2009), “Credit Risk

Management in Commercial Banks”2009,'VoL 2, Ho. 4.

• Treacy William F and Carey Mark S (1998), “Credit Risk

Rating at Large US Banks”, Federal Reserve Bulletin,

November.

• VytautasBoguslauskas, RicardasMileris, RutaAdlyte (2011),

“New Internal Rating Approach For Credit Risk Assessment

,Technological And Economic Development Of Economy”,

2011 Volume 17(2): 369-381.

*Assistant Professor, Jaipuria Institute of Management, Noida (U. P.) Email: [email protected]

INTRODUCTION

Human resources management is now no longer known

as simply HR but in the wake of strategic alignment it is widely

known as Strategic Human Resource Management. This shift

in the name domain is more about aligning HR function with

mission accomplishment of business function. The

organizations that successfully align human resources

management with its mission accomplishment, do so by

integrating HRM into the organization’s planning process,

emphasizing HR activities that support mission goals, and

building strong HR/management relationships. HRM

alignment means to integrate decisions about people with

decisions about the results an organization is trying to obtain.

Well there is a query coming to the mind, is alignment

really required? There is sudden emphasis on aligning HRM

activities with organization’s mission accomplishment.

Basically, it comes down to demonstrate the value of human

resources management to the organization. In the past, one of

the primary roles of HR has been to ensure compliance with

Gone are the days when HR function of an organization

despite being a core business unit, used to live an isolated life,

away from the key business demands and activity. Thanks to

the stakeholders changing view of involving HR into almost

every business decision now a days. The integration of

decisions regarding the human resources of an organization

into overall business strategies is essential to the strategic

management process. All business units, including HR, are on

board with supporting the mission of the organization. To

align the HR of any organization with business strategies, the

top and senior middle level people have got a job. Integration

which probably seems so simple, infact is not, when we talk

about HR role’s in business activities. This article aims at

exploring those areas which leverage the alignment of HR with

business strategies.

Keywords: HR Alignment, Business Goals, Strategy,

Strategic HR, Strategic Partnership

Aligning HR with Business Goals Abdul Qadir*

Hierarchy of Accountability

laws, rules, & regulations. Although this is still, and will

always be, a necessary function, many recent developments

have led to a strong emphasis on results. The main purpose of

alignment is to improve organizational effectiveness,

accountability, service delivery, and decision-making, thereby

improving confidence in the organization. The benefits, HR

alignment brings with mission accomplishment, increases

HR's ability to anticipate its customers' needs, increases the

organization's ability to implement strategic business goals,

and provides decision-makers with critical resource allocation

information. Finally, HR alignment is a vital process to

advance organization’s accountability. In addition to being a

vital contributor to mission accomplishment, HRM alignment

is the ultimate level of HRM accountability. While HRM

accountability must begin with basic legal compliance, it

ultimately encompasses all four levels of the pyramid,

including demonstrating how HRM supports achievement of

the organization strategic goals.

Objectives in ALIGNING HR

Aligning HR with business goals or strategies must be

done in consonance with some key objectives. If the alignment

is done for the sake of simply reshaping the status quo of

current HR practices, then the expected results will be non-

benchmarked. Rather the outcome will be insignificant to

reflect the relevant advantages behind this strategic alignment.

Hence, it is suggested to have some objectives in place before

the strategy is rolled out. Some of these objective could be;

• Right people at the right place

• Align Employees’ Thoughts, Attitudes & Actions towards

Organization’s Goals

• Spot the Talent & Leaders for tomorrow within the

organization

• Be Future ready & Leverage on the best in class HR

Practices

• Turn HR into a Strategic Business Partner

• Proactive decisions to identify and fill performance gaps

• Pick the best amongst the rest

• Consistently achieve corporate objectives

Guidelines to ALIGN HR WITH BUSINESS GOALS/STRATEGIES

1. Set HR goals that contribute directly to organizational

goals. For example, if the organization sets a goal to

become a leader within its industry, HR leaders may

determine that there is a need to develop leadership skills

among employees in order to help the organization meet

that goal. This can be accomplished through the use of

SMART goals. These are goals that are specific and

measurable. They must be reasonably attainable and

relevant to the organization's overall mission. Finally,

human resource goals must be tied to a specific time-line

designed to meet any relevant time-lines set within the

constructs of the overall business strategy.

2. Business Goals of Organization & HR Business

Intelligence. For this we need to determine 3-5 business

goals the organization has and list them in order of

importance. From there you can use the HR department to

collect business intelligence on necessary areas for

improvement. Improvements that make companies better

providers to customers and better employers to the

workforce. Here's an example, assuming employee

turnover is a problem.

To retain talented employees and reduce turnover costs,

companies must understand and respond to the ever-

evolving preferences, expectations, and intents of the

workforce. To collect reliable intelligence, monitor

employees’ views throughout the year. Establish a

baseline measure of employee sentiment and monitor it

monthly, quarterly, or biannually to measure progress,

uncover emerging trends, and identify next step

requirements for improvement. This intelligence model

allows companies to identify issues and take action before

they become problems. So if employee turnover is a

problem, your company can proactively implement

strategies to prevent predictive turnover.

3. Analyze the workforce to determine where there are HR-

related obstacles to the success of business strategies. This

may be accomplished through the use of specific

management tools, such as gap analysis. This basically

determines whether and how close the organization

conforms to the requirements set-forth by business

leaders. It can be used to analyze such aspects as corporate

culture and is essential to determining the specific human

resource strategies required to accommodate business

strategies. The specific strategies necessary will be

determined by the results of the gap analysis.

4. Identifying the Right Measures through HR as

Performance Consultant. A large retailer discloses that HR

over here is a business advisor in the role of a performance

consultant. He shared the following to convey the

emphasis of HR as a business advisor.

“We were struggling with sale of Electronics Equipments

in our Office Automation section of Heavy House Hold

Dept. To understand how to develop and measure a

training programme to improve the sale of electronic

Aligning HR with Business Goals 57

cameras and other electronic goods, after an in-depth

analysis of what was going on in the stores, the HR found

that one of the biggest factors contributing to the lowest

sales ratio was the customer picking up the camera that

was either broken or had a worn-out battery in it. There

were other critical mistakes too which were identified.

These “root causes” were specifically addressed by the

training programme - and HR as consultant was

comfortable to measure and correlate with business

impact. If you know these root causes (also known as

“critical mistake analysis”) then you can measure your

impact by measuring the reduction in these errors.”

Ideally, such cases on the shop floor should be taken care

by respective business manager(s) or supervisor(s), but

these small things at times, slip through the eyes of unit

stakeholders as they get either over-occupied with the

excess footfall or just as a result of sheer ignorance. A

casual walk by the unit while experiencing the products

which have been put on offers by someone own from the

organization, may notice such silly things which

otherwise a customer either would point out or rather

wearing a bad impression walks out from the floor. Such

practices can be demonstrated or brought in routine for

almost any other area of operation.

5. Develop strategic human resource management

programs. For example, if business leaders have set a goal

to boost productivity, the human resource department

should implement programs designed to increase

productivity. This might include the implementation of an

overall performance management program designed to

train and develop employees to give them the necessary

skills to meet productivity goals.

Conclusion

Human Resource(s) is responsible for many of the

activities involved in planning, acquiring, building and

maintaining an organization's human capital. Organizations,

where HR departments are disconnected from the business

may be compromising their ability to compete. Organizations

should encourage active participation of as many people as

possible engaging them in the ongoing dialogue, and involving

them in the strategic planning process, to generate a feeling of

ownership of the process and the outcomes throughout the

organization. Successful organizations of the future must

strategically leverage their HR resources and align them with

the business strategy for meeting the ever-growing challenges

of business world for long-term perspective.

It is positively believed that the article would be of

significant help to the HR professionals as well as strategic

goals stakeholders of our contemporary organization in

successfully planning, and implementing the idea of aligning

HR with business strategies and goals.

References

1. Dreher, Dougherty (2010) Human Resource Strategy - A

Behavioral Perspective for the General Manager. India: Tata

McGraw-Hill, pp. 165-80

2. E.L. Gubman (1998) The Talent Solution: Aligning Strategy

and People to Achieve Extraordinary Results. NeyYork:

McGraw- Hill.

3. Dess, G.D., Lumpkin, G.T., & Eisner, A.B. (2007) Strategic

Management. Burr Ridge, IL: McGraw- Hill/Irwin.

4. Cynthia D. Fisher, Lyle F. Schoenfeldt & James B. Shaw (2009)

Human Resource Management. India: Biztantra, pp. 44-85

5. Cascio, Nambudiri (2010) Managing Human Resources. India:

Tata McGraw-Hill, pp. 151-56

6. J. Barney, “Firm Resources and Sustained Competitive

Advantage”, Journal of Management 17 (1991), pp. 99-120

7. Napier, “Strategy, Human Resources Management, and

Organizational Outcomes.”

8. Hewitt Associates, Innovation: Our Story (Lincolnshire, IL:

Hewitt Associates LLC, 1996)

9. Measures That Matter: Aligning Performance Measures With

C o r p o r a t e S t r a t e g y : K n o w l e d g e @ W h a r t o n -

http://knowledge.wharton.upenn.edu/article.cfm?articleid=73

(Accessed on 20 June 2011)

10. Is Your HR Department Friend or Foe? Depends on Who's

A s k i n g t h e Q u e s t i o n : K n o w l e d g e @ W h a r t o n -

http://knowledge.wharton.upenn.edu/article.cfm?articleid=12

53 (Accessed on 22 June 2011)


*Asst.Prof., STEP-HBTI, Kanpur. Email: [email protected]

INTRODUCTION

The concept of using a card for purchases was described in

1887 by Edward Bellamy in his utopian novel’ Looking

Backward’. Bellamy used the term credit card eleven times in

this novel.

The modern credit card was the successor of a variety of

merchant credit schemes. It was first used in the 1920s, in the

United States, specifically to sell fuel to a growing number of

automobile owners. In 1938 several companies started to

accept each other's cards. Western Union had begun issuing

charge cards to its frequent customers in 1921. Some charge

cards were printed on paper card stock, but were easily

counterfeited.

Over the past few decades, there has been a notable change

in consumer financial services, which has enhanced the use of

credit cards, both for payments and as sources of revolving

credit. Credit cards become very vital financial product for

restaurants, departmental stores and purchase without

carrying cash, held by any household in all the economic strata.

In day to day life, credit cards as well as debit card serve as an

important payment device in place of cash for purchases and

transactions that would otherwise be inconvenient or perhaps

impossible (i.e., making retail purchases by telephone or over

the internet).

Moreover, credit cards have replaced the installment

purchases which used to increase the sales volume of the retail

store in the earlier days. In case of credit cards, the bank (i.e., the

card issuer) lends money to the user based on the credit limit

provided at the time of issuing the credit card as well as the

interest rate fixed by the issuing bank.

The paper reviews the literature pertaining to the selection

of credit cards. It provides the objectives of the study and

research methodology, while it delineates data analysis and

interpretation of results. The paper also highlights the

conclusion of the study.

Credit Card is a system of payment named after the small

plastic card issued to users of the system. However, credit card

selection is very vital decision which comprises both external

and internal factors. Therefore, it is necessary for the marketers

to keep in mind the various factors, which a consumer

undergoes while selecting a credit card so that they can place

the credit card accordingly, for the right segment, in the right

place and finally with the right branding. The paper shows that

there are eight major factors which influence the selection of

credit card among customers. These factors are service offers,

promotional offers, Interest benefits, Cash benefits, Ease of

payments, Payment charges, Card benefits and Time benefit.

Keywords: Credit Card, promotional offers, Ease of

payments, Payment charges

A study on selection criteria of Bank credit cardwith special reference to Kanpur city Yogesh Puri*

LITERATURE REVIEW

Lewis and Bingham (1991) argued that group’s-for-free

gifts and cash incentives will be alienated by any reduction or

removal of the incentives package.

Ausubel (1991), on the basis of how consumers

underestimate their borrowing potential, explained the

phenomenon of high and downwardly sticky interest rates in

the credit card industry. He found that a large number of

consumers in this market are not sensitive to interest rate as in

advance they underestimate their borrowing potential. On the

other hand, those consumers who intend to accumulate mare

debt are interest sensitive. Banks do not follow competing

interest rates as they do not want to attract the high-risk

borrowers.

Meidan and Davos (1994) posited that the most important

factor is the acceptance by a large number of different types of

establishment.

Boyd and White (1994) who focused on the selection

criteria of credit and charge cards found that credit card usage

is also perceived as assigning status to the users. Further, a

study on consumer selection criteria for banks in Poland,

Kennington et al. (1996) indicate that reputation management

will be key for banks if they are to overcome Polish consumers

concerns.

Kara et al. (1994) found that there is a significant difference

in selection of credit card between males and females and that

deferred payment type is considered more important for males

than for females.

Brito and Hartley (1995) explained how consumption

uncertainty and the transaction costs of alternative financing in

liquidity of credit cards will make a consumer borrow on credit

cards in spite of higher interest rate.

Calem and Mester (1995) concluded that the high and

downwardly sticky rates in the credit card market can be partly

explained by the search and switch cost among cardholders.

With the help of independent regressions they explain the

determinants of consumers’ credit card balances and credit

rejection. They find that (a) level of balances and search are

negatively related; and (b) credit rejection and level of balances

are positively related. Hence, they concluded that ‘higher-

balance cardholders’, facing a greater risk of rejection, will

have higher expected search costs and will search less.

Kennington et al. (1996) posited that ranking of criteria

varies with income level and that wealthier customers are not

concerned with price but want reputation, service and

convenience.

However in terms of the lower income brackets, price is

clearly the main concern.

Munro (1997) reveal that lower division students are

much more likely to use their credit cards as a convenience,

while upper division students, and particularly graduate

students, employ a revolving debt payment style more

frequently.

Yee (1997) revealed that inactive cardholders are

significantly less satisfied with large credit limit than active

cardholder and that inactive cardholder rated long interest free

repayment period as highly important criteria. Likewise, Cicic

et al. (2004) and Arbore and Busacca (2009) note that

availability of the 24 h ATM and modern banking as very vital.

Brelin and Mester (2004) have suggested that consumer

search costs were not adequate to explain imperfect

competition in the credit card market. They found that the

distribution of credit card rates in the 1980s, a time when search

costs were thought to be significant, were inconsistent with

those derived from many models of the search.

Lydia and Ramin (2006) found that flexibility is the main

driver in selection for Singapore. Study conducted in Saudi

Arabia by Alhassan and Yakubu (2007) aim to examine the

extent and nature of credit card ownership and usage in the

country and how these are impacted by consumer

demographics and attitudes toward debt reveal that the

international acceptability and usage convenience are the most

positively evaluated credit card attributes.

On Islamic banking, Ridzwan et al. (2008) found that

Islamic credit cardholders’ satisfaction factors are shopping,

bulk purchases and understand concept and the three main

factors that contribute to the satisfaction of the Islamic credit

card holders positively and significantly are more towards

shopping and bulk purchases respectively, while the third

factor, understand concept contributes negatively to the

satisfaction of the Islamic credit card holders.

OBJECTIVES OF THE STUDY

1. To study the factors which affect consumer behavior in

selecting credit cards in Kanpur city?

2. To rank the factors in the order of priority given by the

customers

DATA COLLECTED

Credit card selection needs to be done very carefully

before applying for a credit card. Many factors have to be

considered at the time of credit card selection. The most

common features offered by companies need to be weighed

against the overall cost of owning a credit card. The objective of

the study is to find out the importance of various features that

customers consider important while selecting a credit card. A

questionnaire consisting of 15 items was adapted from the

study of Meidan and Devos (1994), and was further divided

into 5 major attributes that influence customers' choice of credit

card. The questionnaire was an effort to identify the

importance attached to each attribute by the customers for

credit card selection, measured on a 5-point Likert scale

anchored by “least important”-1, “less important”-2,

“important”-3, “much


0

10

20

30

40

STRONGLY DISAGREE DISAGREE NEUTRAL AGREE STRONGLY AGREE

Incentives

A study on selection criteria of Bank credit card with special reference to Kanpur city 61

Important”-4, “very much important”-5 the target

population for this study was the existing credit cardholders

living in different parts of the country. Data is collected from

the people living in Kanpur city. The sample of the study

consisted of 100 credit cardholders

PROCEDURE

The data collected through questionnaire were analyzed

to find out the relative importance of each factor affecting

credit cards sale. However, items in the questionnaire were

adjusted according to the features offered by the domestic

credit card market. Moreover, demographic questions were

also added according to the local conditions. Mean scores of

each attribute were calculated along with their relative

importance to find out the importance of each attribute and

importance of each major variable of selection criteria also

carried out to measure the contribution and importance of each

attribute. The relative importance of each variable was

calculated by dividing the mean score of each item with the

sum of the means of all 28 items, for example

A1=A1/A1+A2+…….A28

Here A1=mean score of factor 1

A2= mean score of factor 2

Loyalty points are not considered as an important factor

by more than 45%of the people. Hence a majority of people

ignored this factor while selecting the credit card.

0

10

20

30

40

50

STRONGLYDISAGREE

DISAGREE NEUTRAL AGREE

Brand Name

STRONGLYAGREE

BrandName

More than 45%of customers strongly agree that brand

name is of high importance for them while selecting a credit

card. Almost 85%agreed that brand name is important for them

while selecting the credit card.

STRONGLYDISAGREE

DISAGREE NEUTRAL AGREE STRONGLYAGREE

0

10

20

30

40

Personal reccomendations

Personal recommendations also have a great impact on the

credit card’s sale. More than 35%of the people strongly agree

that the purchase of their credit card is dependent on personal

recommendations.

STRONGLYDISAGREE

DISAGREE NEUTRAL AGREE STRONGLYAGREE

LoyaltyPoints

0

10

20

30

40

50

Loyalty Points

0

10

20

30

40

50

STRONGLY DISAGREE

DISAGREE NEUTRAL AGREE STRONGLY AGREE

Promotional schemes

Promotional schemes

0

10

20

30

40

50

STRONGLY DISAGREE


Card offered by the bank I use

Nearby 70% of the customers believes that promotional

schemes have a great impact on the purchase of their credit

card. Organizations should introduce promotional schemes

time to time.

Nearly 50% of customers strongly agree that the card they

used is offered by the bank they use. So it serves to be a very

important factor.

35% of customers believe that incentives are hardly of any

value. It does not affect their decision.

0

10

20

30

40

STRONGLY DISAGREE


Repayment time period

0

20

40

60

STRONGLY DISAGREE


Flexibility repayment dates

01020304050

STRONGLY DISAGREE


No annual fee

0

10

20

30

40

50

STRONGLY DISAGREE


Cash back bonus

0

10

20

30

40

STRONGLY DISAGREE


Low payment charges

Repayment time period is an important criterion that

affects the purchase of credit cards. Nearby 60% customers

agree to this point.


Nearby 70% customers considered balance transfer rates

as important factor affecting their purchase decision.

70% of customers believe that low payment charges are an

important factor of selection of credit card.

Nearby 50% of the customers agreed that cash back bonus

affected their purchase decision .

If the company offers high cash back bonus then

customers are more willing to purchase.

Nearby 35% of the customers do not considered no annual

fee as important factor affecting their purchase. Although 65%

customers considered no annual fee as important factor

affecting their purchase.

80% of customers considered balance EMI conversion for

debit amount as important factor affecting their purchase

decision.

0

10

20

30

40

STRONGLY DISAGREE


Low-interst rate

0

10

20

30

40

STRONGLY DISAGREE


Low monthly service charges

01020304050

STRONGLY DISAGREE


Balance transfer interest rates

Low interest rate serves to be an important criterion with

55% of the people supporting this argument.

Nearby 50% of the customers do not considered low

monthly service charges as important factor affecting their

purchase. Only 23% considered it as important factor.

0

20

40

60

STRONGLY DISAGREE


EMI conversion for debit amount

Flexibility repayment dates are considered as an

important factor by most of the people. Nearby 75% of the

customers considered flexibility repayment dates are major

factor affecting their decision.

01020304050

STRONGLY DISAGREE


Convenient



decision.

0

20

40

60

STRONGLY DISAGREE


Security while online transaction

0

20

40

60

STRONGLY DISAGREE


Security while transaction

0

10

20

30

40

50

STRONGLY DISAGREE


Easy access to drop boxes

63A study on selection criteria of Bank credit card with special reference to Kanpur city

Length of promotional offer is not considered as an

important factor by most of the people. Nearby 50% of the

customers do not consider it to be a factor affecting their

decision.

Consolidating debts is not considered as an important

factor by nearby 35% of the customers.



decision.

Free gift provided by the organizations also have an

impact on their sale. Nearby 70%customers give positive

response towards such free gifts.

Reward scheme is not considered as an important factor

by nearby 35% of the customers. Although 60% agree that it is

of value while selecting credit cards.

0

10

20

30

40

STRONGLY DISAGREE


Length of promotional offer

0

20

40

60

STRONGLY DISAGREE


Extended warranty

Extended warranty is considered as an important factor by

most of the people. Nearby 80% of the customers consider it to

be a factor affecting their purchase decision.

More than 35%of customers strongly agree that security

while transaction is of high importance for them while

selecting a credit card. Almost 85%agreed that brand name is

important for them while selecting the credit card.

Almost 80% agreed that security while online transaction

name is important for them while selecting the credit card.

0

10

20

30

40

STRONGLY DISAGREE


Consolidating debts

01020304050

STRONGLY DISAGREE


Timing (Receiving of debts)

01020304050

STRONGLY DISAGREE


Free gift

Timing is a very important factor as it acts as the base of

credit card selection of more than 70% customers.

0

10

20

30

40

STRONGLY DISAGREE


Points/reward scheme

0

10

20

30

40

50

STRONGLY DISAGREE


Good customer care facility

Good customer care facility influences the decision of 70 is

also % of the credit card holders. It is also an important factor

affecting the sale of credit cards.


Table: Showing the relative importance of each factor affecting consumer behaviorin selecting credit card in Kanpur city is given below.

S.No Factors Mean Relative Importance Rank

1 Brand Name 1.24 0.053 1

2 Personal Recommendations 0.81 0.035 9

3 Loyalty Points 0.68 0.029 13

4 Promotional schemes 0.77 0.033 11

5 Card offered by the bank I use 0.93 0.040 7

6 Incentives 0.47 0.020 17

7 Repayment time period 0.76 0.033 11

8 Low payment charges 0.43 0.018 18

9 Cash back bonus 1.15 0.049 3

10 Low-interest rate 0.58 0.025 14

11 Low monthly service charges 0.54 0.023 16

12 Balance transfer interest rates 0.59 0.025 14

13 EMI conversion for debit amount 0.71 0.030 12

14 No annual fee 0.73 0.031 11

15 Flexibility repayment dates 0.93 0.040 7

16 Online operation facility 1.02 0.044 5

17 Convenient 1.11 0.048 4

18 Length of promotional offer 0.57 0.024 15

19 Easy access to drop boxes 0.96 0.041 6

20 Extended warranty 1.13 0.048 4

21 Security while transaction 1.18 0.051 2

22 Security while online transaction 0.94 0.040 7

23 Consolidating debts 0.72 0.031 11

24 Timing(Receiving of debts) 0.95 0.041 6

25 Free gift 0.92 0.039 8

26 Points/reward scheme 0.72 0.031 11

27 Good customer care facility 1.03 0.044 5

28 Supporting a charity 0.73 0.031 11

65A study on selection criteria of Bank credit card with special reference to Kanpur city

Table: Depicting eight major factors and their importance as selecting criteria for the purchase of credit card

Name of Dimension Factors Relative importance Value

Promotional offers Promotional schemes,

Incentives, Consolidating

debts, Free gift, Points/reward

scheme

0.033

0.020

0.031

0.039

0.031

0.154

Interest benefits Low monthly service charges,

Balance transfer interest rates

0.023

0.025

0.048

Cash benefits Cash back bonus, No annual

fee

0.049

0.031

0.080

Ease of payment EMI conversion for debit

amount, Flexibility repayment

dates

0.030

0.040

0.070

Payment charges Low payment charges,

Supporting a charity

0.018

0.031

0.049

Card benefits Card offered by the bank I use

,Low-interest rate

0.040

0.025

0.065

Time benefit Repayment time period 0.033 0.033

A pie chart showing the relative importance of factors affecting sales of credit cards in Kanpur city is given below.

Relative importance of factors affecting sales of credit cards

Service offers

Promotional offers

Interest benefits

Cash benefits

Ease of payment

Payment charges

Card benefits

CONCLUSION

Results demonstrate the mean scores and relative

importance of each attribute of credit card selection criteria.

Service factors and promotional offers have the greatest impact

on the sale of credit cards. It can be concluded that Brand name

and security while transaction are the factors which have a

major impact. Then warranty, convenience, cash back bonus

also affect customer’s attitude. Repayment time period and

low payment charges have the least impact.

Convenience, online operation facility free gifts offered

are also the important factors that customers consider

important while selecting a credit card. Locality points and no

annual fees are other essential and important areas for

cardholders.

Though indication of prestige variable has been

decreasing over the period of time it still has a noticeable

importance according to the credit cardholders. These results

also indicate a change in customers mind and advancement

towards marketing growth and stability. Though cardholders

have concerns about the prestige, security and economical

features of the credit cards, they are more inclined towards the

operation ability and acceptability of their instrument. They

are ready to give preference to those credit cards which can be

used and accepted anywhere in domestic and international

market with appropriate security and reasonable economy.

Keeping in view the conclusions earlier drawn from the results,

it is suggested that banks should be more innovative and

proactive in their offerings to gain the competitive edge in this

sheer pace changing environment. They have environment.

They have to introduce such perceptible features to attract the

customers towards this barely differentiable product. They

should extend their network and relations with other

stakeholders to enhance the utilization and acceptability of

their cards as existing and potential customers are more

engrossed in it. Banks should develop an appropriate

marketing mix to promote credit cards by highlighting the

prominent attributes unknown to existing product and from

their competitors. Most importantly, they have to show their

potential customers how essential and beneficial these new

features are to them. Last but not the least banks should remain

on their toes to be flexible and innovative in offering new

incentives, attractive features and economical utilization of

their product to satisfy their existing customers and to

magnetize potential ones.


SUGGESTIONS

Understanding of the factors that explain consumer

buying behavior of credit card users’, help in providing

essential insights into strategists of financial information. The

study suggests that factors like brand name and security while

transaction should be given maximum emphasis.

Organizations should take a good care of their brand name.

Other factors like warranty, convenience and cash back bonus

may be given lesser importance as they lie below in the priority

list. Repayment time period and low payment charges can be

given the least importance.

REFERENCES

• Ausbel L (1991),”The failure of competition in the credit card

markets”, American Economic Review, Vol.81, No.1, pp.50-81

• Berlin M and Master J (2004)”Credit card rates and consumer

search” Review of Financial Economics, Vol.13, pp.179-198

• Brito D L and Hartley P (1995)”Consumer rationality and

credit cards”, Journal of Political Economy, Vol.103, No.21,

pp.400-433

• Ravichandran Subramaniam and Maran Marimuthu (2010)

“Bank credit card and the selection criteria: An exploratory

study” African Journal of Business Management Vol. 4(16), pp.

3463-3472.

• Babar Zaheer Butt, Kashif Ur Rehman, M. Iqbal Saif and

Nadeem Safwan (2010)”Customers’ credit card selection

criteria in perspective of an emerging market” African Journal of

Business Management Vol.4 (13), pp. 2934-2940.

• Alhassan GAM, Yakubu AU (2007). Credit card ownership and

usage behavior in Saudi Arabia: The impact of

demographics and attitudes towards debt. J. Financial Services

Market, 12(3), 219-234.

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decision and market segmentation. J. Mark., 40: 40-45.

• Ridzwan N, Shah MD, Hanifah AH (2008). Factors influencing

the Islamic credit cards holders’ satisfaction. The Business

Review

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perspective. J. Market. Manage, 11, 133-149

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Usage: The Case of a Developing Economy”, Int. J. Bank Mark,

10(6): 27-31.

• Canner GB, Cyernak WA (1986). “Determinants of Consumer

Credit Card Usage Patterns”, J. Retail Bank, 8(1): 9-18.

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Singapore Perspective”, Economic Growth Centre, working

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selection criteria in Singapore", paper presented at The Pacific

Basin Finance,Economics and Accounting 10th Annual

Conference, Singapore, 7-8 August.

*Associate Professor and HOD, Dept. of Management, Greater Noida Institute of Technology, (U.P.) Email: [email protected]

**Professor, Department of Commerce, Berhampur University, Odisha

INTRODUCTION

The banking sector in India has undergone remarkable

changes since the economic reforms initiated in 1991-92. The

period has been marked by a slew of reforms in the sector,

which provided the much needed impetus for the growth of

the sector as a whole. The major reform initiatives during this

period include deregulation of interest rates, adoption of

prudential norms in terms of capital adequacy, asset

classification and provisioning, lowering of reserve

requirements in terms of Statutory Liquidity Ratio (SLR) and

Cash Reserve Ratio (CRR), dilution of government equity

holding in public sector banks, opening of the sector to private

participation, permission to foreign banks to expand their

operations through subsidiaries, introduction of universal

banking, greater emphasis on risk management by allowing

banks to participate in instruments such as interest rate swaps,

cross country forward contracts, liquidity adjustment facility,

liberalisation of FDI norms in banks and the introduction of

Real Time Gross Settlement (RTGS), among others. Those

measures along with Reserve Bank of India’s (RBI) efforts to

adopt international banking standards and best practices as

prescribed in the Basel Accords have no doubt helped

enormously the banking industry to enter a new era. In

February 2005, RBI had stated in its “Road Map for Presence of

Foreign Banks in India” that it would revisit the policy in 2009

and explore allowing Foreign banks a larger play locally

(giving national treatments and market access within WTO

norms) subject to interests of all stakeholders. RBI has been

much more liberal in its policies towards foreign banks vis-à-

vis developed countries. Against such backdrop, the article

evaluate the performance of Foreign Banks operating in India

in the post reform period.

OBJECTIVES OF THE STUDY

It is almost fifteen years since the Indian banking sector

was liberalised paradigm shift has taken place, with the entry

of private and foreign banks in terms of competition and

profits. The present study will be conducted with the following

objectives:

• To discuss the origin and growth of Foreign banks

The Indian banking system has witnessed a significant

transformation in recent years. With the institution of

financial sector reforms: (i) policy changes are brought in,

which aim at enhancing the competition and thus includes

permitting new banks and allowing more foreign banks to

operate in the country; (ii) measures aimed at improving the

financial health and soundness of banks by introducing

appropriate prudential norms and measures for providing

more freedom to the banking system: interest rate

deregulation, reduction in Statutory Liquidity Ratio (SLR),

etc. In the event of the growing competition, the policy changes

and flexible operational environment in Indian banking

system, there has been an increased focus on profitability,

although other social objectives continue to be important.

Generally, foreign banks have fared better than public sector

banks, new private sector banks, old private sector banks in

terms of profit performance in most of the years which reflects

the favourable effect of adoption of new technology. The level of

non-performing assets as a proportion of net advances showed

deterioration in case of foreign banks as compared to public

sector banks. In addition, the requirement in respect of priority

sector loans for foreign banks was also less as compared with

Indian banks. In February 2005, RBI had stated in its “Road

Map for Presence of Foreign Banks in India” that it would

revisit the policy in 2009 and explore allowing Foreign banks a

larger play locally (giving national treatments and market

access within WTO norms) subject to interests of all

stakeholders. RBI has been much more liberal in its policies

towards foreign banks vis-à-vis developed countries. However,

RBI gave foreign banks a window of opportunity which they

grabbed with both hands. In its move to encourage banks to

open branches in under-banked areas, RBI recently allowed

domestic banks to open branches in Tier-III to Tier-VI cities

without prior approval. Foreign banks, too, are being

encouraged to open shop in under-banked areas. Data from

RBI clearly reflect the trend till April 1,2007, foreign banks

had no branch in rural centres( population less than 9,999) and

only two branches in semi-urban centres( population less than

99,999). Between April 1, 2009, foreign banks opened 16

branches, of which four were in rural areas and two in semi-

urban areas.

Performance of Foreign Banks in India:An Assessment

Dr. Durga Madhab Mahapatra*Prof. (Dr.) Ashok K. Mohanty**

operation in India;

• To examine the performance of foreign banks during

2005-06 to-2009-10.

• To evaluate the performance of top ten foreign banks

operate in India.


Singh and Sharma (2012) stated about reforms in banking

sector impacts upon foreign banks operating in India. The

performance of foreign banks improved after reforms in terms

of numbers, size, profitability and efficiency. As a result of the

reforms, the number of foreign banks increased rapidly. Verma

and Bodla (2011) attempt to evaluate the productive efficiency

of Scheduled Commercial Banks (SCBs) operating in India

from the year 1998-99 to 2007-08. The study indicate that the

Scheduled Commercial Banks need a lot of improvement in

their efficiency level, as at the most only 42.9 percent foreign

banks, 42.9 percent public sector banks and 40 percent private

sector banks in India. Wanniarachchige, M.K and Ritsumeikan;

Y.S. (2011) stated how state-owned, nationalized and domestic

private banks are behind foreign banks using data

envelopment analysis together with three supplementary

measures of performance from 2002-2009. But the performance

of domestic banks has not yet reached the level of foreign banks

in terms of both cost and revenue efficiencies.

ORIGIN AND GROWTH OF FOREIGN BANKS IN INDIA.

The Indian banking system has also witnessed certain

visible structural changes in the post-liberalisation period. One

of the important changes that took place is the dilution of

government equity in public sector banks, apart from mergers

/ amalgamations and entry of new private and foreign banks.

In three PSBs, the government equity holding has come down

to about 51 per cent. The changes in ownership structure along

with consolidation and entry of private and foreign banks are

expected to have an impact on the overall competition in the

banking sector in post liberalisation period. The number of

foreign banks operating in India has actually declined from 42

during 1997-98 to about 29 in 2007. While this was partly due to

mergers between the Indian branches of foreign banks, there

were also closures of some foreign banks in this period. Foreign

banks in India account for roughly 6.5% of the banking

industry’s assets and there has not been any change in their

market share over the years. The total number of foreign banks

operating in India was 31 as on December 2007 with 273

branches. The few foreign banks operational history are

Standard Chartered started its Indian operations by opening

its first branch in Kolkata in April 1858, a year after the so-

called first war of Independence in which sepoys of the British

East India Company’s army rebelled against the rulaers. With

around Rs.1 trillion of assets, Standard Chartered now has 94

branches spread over 37 centres. Hongkong and Shanghi

Banking Corp.Ltd, or HSBC, has been in India even longer. Its

origin can be traced back to October 1853, when Mercantile

Bank of India, London and china was founded in Mumbai with

authorised capital of Rs.50 lakh. By 1855, Mercantile Bank had

offices in London, Chennai, Colombo, Kandy, Kolkata,

Singapore, Hong Kong, Guangchow and Shanghai. It was

acquired by HSBC in 1959. With close to a Rs.1 trillion asset

book, HSBC has 47 branches and three new branch licences in

India. Citibank NA, which has the biggest asset base among all

foreign banks in India, is 107 years old. It has 42 branches across

29 centres. Among other foreign banks, ABN Amro Holding

NV, which came to India in 1920( again, Kolkatta was the first

port of call), has 31 branches and deutsche Bank AG, 30 years

old in India, is present in 12 centres through 13 branches.

Barclays Bank Plc, which launched its India operations in

November 2006, has seven branches. Foreign banks will play a

critical role in raising money for them, connecting them with a

global clientele and consumers. At the same time, they need to

look at Indian business opportunities differently. A corollary

to this finding is that if banking sector is further opened up, the

pressure of competition will intensify and put further strain on

the bottom lines of existing banks for improving performance.

One of the primary reasons for allowing foreign banks to enter

in a country is to improve the quality and the efficiency of

banking services and to bring more efficiency and

transparency in the financial sector. Across the world, the entry

of foreign banks in a country has usually been found to benefit

the end consumers as it has led to increased credit availability,

more efficient banking and a higher rate of economic growth.

The entry of foreign banks has especially benefited developing

countries where the foreign entrants are more efficient than the

local banks and raise the overall level of competition.

However, the implications of foreign bank entry on the

stability of the domestic banking sector have been widely

debated. This is especially the case for developing countries

where the financial sector is still not very robust and economic

crisis have occurred in the past. Foreign banks are considered

detrimental to the stability of the economy because they

expedite capital flight during troubled times and worsen

economic crisis scenarios.

However, the opening of twenty-nine private banks and

thirty-one foreign banks by December 2007 has been a major

milestone in the history of the banking sector in the country.

The entry of such banks has several benefits. Indian banks have

been forced to become more competitive as they have to

compete with extremely efficient services provided by the

foreign banks. These banks originated from 19 countries in

addition to 34 foreign banks operated in India through

representative offices. Indian banks continued to rapidly

expand their existence overseas. During 2006-07, nine PSBs

and two new private sector banks operated with ten branches,

two subsidiaries with six representative offices and one joint

venture unit mainly in the Asian and Middle-East countries.

The Bank of Baroda, among all other Indian banks, has largest

operating units functioning abroad. In addition to the private

sector banks, foreign banks are also operating in India. The

total number of foreign banks operating in India was 31 as on

December 2007 with 273 branches. Such foreign banks are: (1)

ABN-AMRO Bank N.V., (2) Abu Dhabi Commercial Bank Ltd.,

(3) American Express Bank Ltd., (4) Antwerp Diamond Bank,

(5) Arab Bangladesh Bank Ltd., (6) Bank International

Indonesia, (7) Bank of America NA, (8) Bank of Bahrain &

Kuwait B.S.C., (9) Bank of Ceylon, (10) Bank of Nava Scotia,

(11) Bank of Tokyo-Mitsubishi Ltd., (12) Barclays Bank PLC,


Performance of Foreign Banks in India: An Assessment 69

(13) BNP Paribas, (14) Calyon Bank, (15) Chinatrust

Commecial Bank, (16) Citi Bank NA, (17) Deutsche Bank Ag,

(18) Development Bank of Singapore Ltd., (19) HSBC Ltd., (20)

ING Bank N.V., (21) JP Morgan Chase Bank., (22) Krung Thai

Bank Public Co. Ltd., (23) Mashreqbank PSC, (24) Mizuho

Corporate Bank Ltd., (25) Oman International Bank S.A.O.G.,

(26) Shinhan Bank, (27) Societe Generale, (28) Sonali Bank, (29)

Standard Chartered Bank, (30) State Bank of Mauritius Ltd. and

(31) UFJ Bank Ltd. Almost all the foreign banks operating in

India are multinationals. Indian business forms only a small

fraction of their entire global business.

PERFORMANCE OF FOREIGN BANKSOPERATIONS IN INDIA

From India’s point of view, the entry of foreign banks has

several benefits. The most important thing that the Indian

banks have been forced to become more competitive as they

have to compete with extremely efficient services provided by

the foreign banks. There is an inflow of new banking

technology and also new financial products which in the

normal course may not be available for the borrowers and

investors in this country. Moreover, foreign banks have great

access to the international network which facilitates import of

ideas and systems regarding the financial environment

available internationally and the extent to which it can be

adopted in the host country. The foreign banks can also have

positive impact on the levels of foreign investment in India.

The branch of the foreign banks operating in India can often act

as an important determinant for foreign corporations wishing

to invest in India. Foreign investors usually rely on bankers’

judgement for overseas investment. Such banks are an

important medium for projecting the country’s image abroad.

Thus, foreign banks have provided Indian operations access to

foreign collaborations as well as introduced foreign companies

to Indian bankers. Presence of foreign banks also helps Indian

corporations and government agencies to have access to

international capital markets.

The Table 01 depicts the performance of foreign banks

operation during 2005-06 to 2009-10. The number of offices has

been increased 259 in 2005-06 to 316 in 2010-11 with relative

aspect to employees, business per employees( in lakhs), capital

and reserve and surplus, deposits, investments and advances

also. The net NPA ratio has been come down 0.83 percent to

0.67 percent in 2010-11 but slightly increase 1.81 in 2008-09 and

1.82 in 2009-10. Further overall performance of Foreign banks

during this period grows relatively good.

Table 1: Performance of Foreign Banks operation during 2005-06 to 2010-11

Items 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

No. of offices 259 272 279 295 310 316

No. of employees 22117 28426 33969 29582 27742 27968

Business per employees (in lakh)

955.41 974.77 1037.10 1282.74 1445.87 1559.74

Profit per employee(in lakh)

13.87 16.13 19.47 25.39 17.09 27.59

Capital and Reserves & surplus

24314 33075 49332 59937 69061 80972

Deposits 113745 150750 191161 214076 237853 240689

Investments 52384 71471 98910 130354 159286 165499

Advances 97562 126339 161133 165385 163260 195539

Interest income 12291 17924 24417 30322 26389 28520

Other income 5371 7044 10588 14894 9951 10972

Interest expended 5149 7603 10604 12819 8938 10622

Operating expenses 5854 7745 10353 12298 11102 12557

Cost of funds(CoF) 3.63 4.03 4.33 4.46 2.82 3.11

Return on advances adjusted to CoF

4.90 5.74 6.60 8.14 7.17 5.64

Wages as % to total expenses

18.22 20.08 19.95 19.44 23.48 23.31

Return on assets 2.08 2.28 2.09 1.99 1.26 1.74

CRAR 13.02 12.39 13.08 14.32 17.25 16.72

Net NPA ratio 0.83 0.73 0.77 1.81 1.82 0.67

(Source: Profile of Banks 2010-11, RBI Publication)

The Table no. 2 depicts the total assets, total advances and

deposits of top ten foreign banks during 2009-10. The positive

growth of total assets of foreign banks are Deutsche Bank

(13.53%), Barclays Bank(2.94%), DBS(26.20%), Bank of

America(36.93%) and JP Morgan Chase Bank(13.84%) during

2009-10 and 2010-11. But in terms of advances is concerned

Standard Chartered Bank(10.84%), Deutsche Bank(46.89%),

DBS(47.46%), Bank of America(8.20%), and JP Morgan Chase

Bank(44.08%) and least change (0.75%) of BNP Paribas. As

deposit is concerned Citi Bank (5.37%), HSBC (11.56%),

Standard Chartered Bank (15.29%), Royal Bank of Scotland

(ABN) (4.02) and highest deposit of JP Morgan Chase (65.36%)

and BNP Paribas (62.32%).


The Table no. 3 depicts the Total income and Interest

income of top ten foreign banks for the period 2009-10 and

2010-11. Bank’s income is basically made up of interest income

and other income. It can be observed the table that all the

foreign banks except Bank of America of total income is shows

negative and as compared to Interest income is concerned

except Standard Chartered bank positive growth (0.45%) and

DBS (8.80%) during this period. All other top foreign banks like

Citi Bank, HSBC, Deutsche Bank, Barclays Bank, bank of

America, BNP Paribas shows negative during 2009-10 and

2010-11.

Total assets(Rs.Crore) Total Advances (Rs. Crore) Deposits

Sr no.

Name of Bank

2009

2010

% Change

2009

2010

% Change

2009

2010

% Change

1 Citi Bank

105263.59

95488.69

-9.29

39919.94

36655.07

-8.18

51677.46

54452.13 5.37

2 HSBC

94620.39

90425.39

-4.43

27588.69

23474.77

-14.91

49970.28

55742.82

11.56

3 Standard Chartered Bank

97465.27 89544.63 -8.13 37489.13 41552.15 10.84 41801.77 48192.39 15.29

4 Deutsche Bank 24954.87 28330.75 13.53 8797.63 12922.79 46.89 14147.37 13928.83 -1.54

5 Royal Bank of

Scotland(ABN)

30093.00 23809.79 -20.88 16659.74 13406.05 -19.53 15960.26 16601.48 4.02

6 Barclays Bank 20688.63 21297.17 2.94 10550.51 7565.20 -28.30 12485.52 11495.72 -7.93

7 DBS

12564.59

15856.40

26.20

2722.85

4015.20

47.46

6022.86

8312.64 38.02

8 Bank of America

9854.35

13480.90

36.93

3355.94

3631.16

8.20

4166.75

5490.33 31.77

9 JP Morgan Chase Bank

10531.23

11988.36

13.84

702.55

1012.20

44.08

3586.60

5930.94

65.36

10 BNP Paribas 9827.99 9415.95 -4.19 3709.88 3737.61 0.75 3353.14 5442.83 62.32

Table 2: Performance of top ten Foreign Banks in terms of assets, advances and deposits during 2009-10 and 2010-11

(Source: Annual Reports of Respective Banks, CAR according to Basel-I)

Table 3: Performance of top ten Foreign Banks in terms of incomes and interest income during 2009-10 and 2010-11

Total Income (Rs. Crore) Interest Income (Rs. Crore)

Sr. No. Name of the Bank 2009 2010 % Change

2009 2010 % Change

1 Citi Bank

10422.54 7661.80 -26.49 6840.24 6070.47 -11.25

2 HSBC

9026.35 7301.37 -19.11 6326.93 5165.88 -18.35


8746.46 8512.51 -2.67 5649.41 5674.89 0.45

4 Deutsche Bank

2901.13 2395.92 -17.41 1881.44 1578.87 -16.08

5 Royal Bank of

Scotland(ABN)

4344.78 2875.73 -33.81 3119.67 2126.26 -31.84

6 Barclays Bank

2625.74 1808.48 -31.12 2036.54 1659.26 -18.53

7 DBS

1110.84 1034.68 -6.86 808.64 879.81 8.80

8 Bank of America

1000.23 1061.47 6.12 606.91 568.62 -6.31


1234.14 337.11 -72.68 513.20 438.10 -14.63

10 BNP Paribas

879.76 779.67 -11.38 636.58 584.96 -8.11


71Performance of Foreign Banks in India: An Assessment

The table-5 presents the Net NPA and Capital Adequacy

during 2009-10 and 2010-11. An analysis shows the highest net

NPA foreign banks are Barclays Bank (5.15%), JP Morgan

Chase Bank (2.88%), and HSBC Bank (2.31%). Capital

Adequacy Ratio (CAR) is a significant parameter with regard

to the strengthening and stability of the banking system. This

ratio is calculated by binding the debt and equity of the bank.

The capital adequacy should bring safety to the bank and it

should be more conservative when lending without sacrifing it

revenue. This ratio shows the strength of a bank. Higher the

ratio, higher will be the score of the bank. The table shows good

strength of foreign banks are Citi Bank, HSBC Bank, Deutsche

Bank, Barclays Bank, DBS, JP Morgan Chase Bank etc.

Table-4 also explains the Operating profit, i.e. gross profit-

a strutctural measure of profitability in a bank. It is the excess of

Bank’s income over expenses, other than expenses and other

than provisions. When a bank’s interest and other incomes

exceed the bank’s interest and operating expenses, the

operating profit rises. The top foreign banks like Citi bank (-

39.13%), HSBC (-17.60%) except Standard Chartered Bank

(14.71%) is shows negative growth during this period. The net

profit of a bank is the excess of operating profit over provisions

and contingencies. The net profit also shows negative growth

of top foreign bank like Citi bank, HSBC, and JP Morgan Chase

Bank.

Table 4: Performance of top ten Foreign Banks in terms of operating profitand Net Profit during 2009-10 and 2010-11

Operating Profit Rs.in Crore) Net Profit (Rs.in Crore)

Sr. no. Name of Bank 2009 2010 % Change 2009 2010 % Change

1 Citi Bank

5406.47 3290.73 -39.13 2173.08 860.39 -60.41

2 HSBC

4170.68 3436.59 -17.60 1291.28 809.91 -37.28


3757.14 4309.75 14.71 1906.77 2127.04 11.55

4 Deutsche Bank

1158.12 1137.18 -1.81 430.06 446.35 3.79

5 Royal Bank of Scotland(ABN)

1410.28 1165.34 -17.37 19.40 -104.85 _

6 Barclays Bank

754.77 330.26 -56.24 30.10 -554.07 _

7 DBS

452.10 549.52 21.55 259.04 270.03 4.24

8 Bank of America

673.19 631.62 -6.18 336.99 350.45 3.99


865.53 -5.77 _ 443.86 11.04 -97.51

10 BNP Paribas

414.06 398.53 -3.75 169.97 180.41 6.14


Table 5: Performance of top ten Foreign Banks in terms of operating profitand Net Profit during 2009-10 and 2010-11

Net NPA (%) CAR: Capital Adequacy Ratio (%)

Sr.No. Name of Bank 2009 2010 % Change 2009 2010 % Change

1 Citi Bank 1.23 2.63 2.14 12.00 13.23 18.14

2 HSBC 0.58 1.42 2.31 10.59 15.31 18.03

3 Standard Chartered Bank 1.04 1.37 1.40 10.59 11.56 12.41

4 Deutsche Bank 0.22 0.88 0.79 15.05 15.25 16.45

5 Royal Bank of Scotland(ABN) 0.85 2.20 1.95 12.92 12.66 12.50

6 Barclays Bank 0.42 4.59 5.15 21.11 17.07 16.99

7 DBS 0.05 0.55 1.00 18.15 15.70 16.96

8 Bank of America 0.00 0.00 0.00 13.45 12.73 15.49

9 JP Morgan Chase Bank 2.12 1.27 2.88 17.72 15.90 23.63

10 BNP Paribas

0.00 0.86 0.00 12.66 12.37 15.78



CONCLUSION

The foreign banks can also have positive impact on the

levels of foreign investment in India. The branch of the foreign

banks operating in India can often act as an important

determinant for foreign corporations wishing to invest in

India. Foreign investors usually rely on bankers’ judgement for

overseas investment. Such banks are an important medium for

projecting the country’s image abroad. Thus, foreign banks

have provided Indian operations access to foreign

collaborations as well as introduced foreign companies to

Indian bankers. But in terms of advances is concerned

Standard Chartered Bank (10.84%), Deutsche Bank (46.89%),

DBS (47.46%), Bank of America (8.20%), and JP Morgan Chase

Bank (44.08%) and least change (0.75%) of BNP Paribas. As

deposit is concerned Citi Bank (5.37%), HSBC (11.56%),

Standard Chartered Bank (15.29%), Royal Bank of Scotland

(ABN) (4.02) and highest deposit of JP Morgan Chase (65.36%)

and BNP Paribas (62.32%). All other top foreign banks like Citi

Bank, HSBC, Deutsche Bank, Barclays Bank, bank of America,

BNP Paribas shows negative during 2009-10 and 2010-11. The

net profit of a bank is the excess of operating profit over

provisions and contingencies. The net profit also shows

negative growth of top foreign bank like Citi bank, HSBC, and

JP Morgan Chase Bank. The capital adequacy should bring

safety to the bank and it should be more conservative when

lending without sacrifing it revenue. This ratio shows the

strength of a bank. Higher the ratio, higher will be the score of

the bank. The table shows good strength of foreign banks are

Citi Bank, HSBC Bank, Deutsche Bank, Barclays Bank, DBS, JP

Morgan Chase Bank etc.

REFERENCES

• Verma, R. and Bodla, B.S. (2011) “Performance of scheduled

commercial banks in India: An application of DEA”, Decision,

Vol.38, No.1, April, 2011, PP. 06-76.

• Singh; M.K and Sharma, S. (2012) “Impact of Banking Reforms

on foreign Banks in India, International Journal Research, Vol.

1, No. 2, January 2012, PP. 24-29, ISSN : 2231-6124

• Wanniarachchige; M. K and Ritsumeikan, Y.S. (2011) “How

does ownership affect bank performance? - The Case of Indian

Commercial banks”, International Business and Economics

Research Journal, Vol.10, No.3, march 2011, PP.71-81.

• Mahapatra, D. M. and Mohanty, A. K. (2007), Financing of

Small and Medium Enterprises in India, Serials Publications,

New Delhi.

• Mahapatra, D. M. and Mohanty, A.K. (2010), Management of

NPAs and Indian Banking Sector, Global Research

Publications, New Delhi.

• “A Hundred Small Steps” (2009): Report of the Committee on

Financial Sector Reforms, Planning Commission, Government

of India. Report on Trend and Progress of Banking in India,

Reserve Bank of India, New Delhi (1991-92 to 2006-07) Various

Issues.

• Report of the Committee on the Financial System (Chairman: M.

Narasimham), Reserve Bank of India, New Delhi, 1991.

• Report of the Committee on the Banking Sector Reforms

(Chairman: M. Narasimham), Reserve Bank of India, New

Delhi, 1998.

• RBI Study (1999), “Some Aspects and Issues Relating to NPAs

in Commercial Banks”, PNB Monthly Review, July, Vol. 21,

No. 3.

• Dash, M. and Mohanty; A. K. (2010)” Status of Asset

Composition of Commercial Banks in India: A Review” Journal

of Engineering, ICT and Management, July 2010-December

2010, Vol1, No.1, pp. 7-18, ISSN 2230-9756.

• Mahapatra; D.M. and Mohanty; A.K. (2010) ”Indian Banking

Sector: Literature Review” NIFM Journal of Public Financial

Management, July 2010-December 2010, Vol1, No.2, pp.37-58,

RNI Registration No. HARENG/2009/32268.

• Mahapatra; D.M. and Mohanty; A.K. (2010) “Non-Performing

Assets (NPAs) of Foreign Banks in India in the Post Reform Era:

An analytical Study” Mangalmay Journal of Management &

Technology, in collaboration with Lincoln University of The

Commonwealth system of Higher Education, Pennsylvania,

USA, vol. 4, No. 1, January-June Issue 2010, pp.13-28.

• Mahaapatra; D.M. and Mohanty; A.K. (2011) ”NPA

Management : Emerging market perspective with Indian PSBs

Focus” HR Journal of Management, Vol. 4, No. 1, April-

September 2011, PP. 26-34 ISSN 0974-7737.

• Mahaapatra; D.M. and Mohanty; A.K. (2011) ”A Road Map of

Reform to Next-Generation Reform of Indian Banking sector:

An Assessment” SRUJAN, -Journal of DIT School of Business,

Vol.1, No.1 , July-December 2011, PP.1-16 ISSN 2250-1347.

• Mahaapatra; D.M. and Mohanty; A.K. (2011) ”Problems and

Challenges of Public Sector Banks (PSBs) in India During

Globalized Era”, LACHOO Management Journal, Volume 2,

Number 2, July - December 2011, Pp. 89-101, ISSN 2231-0118.

• Mahaapatra; D.M. and Mohanty; A.K. (2012) ”Impact of NPAs

on profitability of commercial banks in India in the post reform

era: With special reference to Public Sector Banks” Aweshkar,-

Research Journal of We School, Vol.XIII, Issue.1, March 2012,

pp. 42-62. ISSN 0974-1119.

• “A Hundred Small Steps” (2009): Report of the Committee on

Financial Sector Reforms, Planning Commission, Government

of India. Report on Trend and Progress of Banking in India,

Reserve Bank of India, New Delhi (1991-92 to 2006-07) Various

Issues.

• Report of the Committee on the Financial System (Chairman: M.

Narasimham), Reserve Bank of India, New Delhi, 1991.

• Report of the Committee on the Banking Sector Reforms

(Chairman: M. Narasimham), Reserve Bank of India, New

Delhi, 1998.

*Assistant Professor, Department of Economics, The University of Burdwan, Golapbag Campus, Burdwan, India. Email: [email protected]

INTRODUCTION

In this paper an attempt has been made to study and

examine performance of commercial banks from the

perspective of the ownership structure of a bank. There is a

prevalent common belief that among the factors affecting the

performance of banks, ownership structure is one of the crucial

factors. The paper is a humble attempt to approve/disapprove

this common belief in terms of a very rudimentary approach

involving ratio analysis.

Banks can be classified into public sector banks and

private sector banks on the basis of the ownership structure,

where the former are controlled by the State and the latter by

private and foreign enterprises. The “development” view of

public sector banks as identified by Sabi (1991), Davies and

Brucato (1987) emphasized on the need of the government to

provide institutional credit in an underdeveloped country as

the private sector banks are incapable of doing so due to their

optimization constraint. Moreover, Sarkar, et. al. (1998). La

Porta, et. al. (2000) observes the role of the government as a

maximizing entity and they own banks and financial

institutions to fund their own fiscal deficit. On the other hand,

private banks operate with a profit maximizing objective and

function under conditions favourable to optimization. There

has been an extensive work to study the relationship between

ownership structure and banks’ performance. In all those

studies, the general observation is that the privately owned

banks tend to outperform their public counterparts. In support

of such a general claim, two schools of thought emerge: (1) the

Property rights approach (Alchin, (1965), De Alessi (1980))

based on the view that private sectors banks perform better

because of the market share and the ensuing threat of takeovers

and loss of reputation, and (2) the Public choice approach

(Nickskamen (1971), Levy (1987)) that attributes the poor

performance of the public sector banks to its various

inefficiencies. Recent studies involving the risk adjusted bank

performance found that the new generation banks (new

private sector and foreign banks) have a higher risk adjusted

return as compared to old private sector and public banks

because of diversification in their income sources. Moreover,

there are studies indicating that both the foreign and domestic

The paper attempts to highlight the relationship between

Banks’ performance vis-à-vis its ownership structure. A case

study is offered in terms of three banks; each bank under three

categories of ownership structure, namely public sector,

private sector and foreign bank. A simple ratio analysis is

carried out for each of these different entities of the banks. The

result suggests that foreign banks are vulnerable to shocks

while the public sector banks still maintains the confidence of

the public at large in terms of security and low risk banks.

JEL classification: G21, G280

Keywords: Banks, Financial institution and services

Banks’ Ownership Structure andTheir Performance: A Case Study Dr. Bhaskar Goswami*

private banks are superior to their public counterparts with

respect to some performance indicators like, Return on Asset

and Operating Profit Ratio. But the public sector banks appear

to be more efficient with respect to Operating Cost Ratio and

Net Interest Margin. However as pointed out by Caves and

Christensen (1980), public ownership may work equally well

as that of the private entity under sufficient competition

between the private and the public sector. Casual empiricism

suggests that in the post liberalization period, enhanced

competition has resulted in improved performance of the

public sector banks.

One potential danger of privatization comes from the risk

of bank failure. The government is, understandably, reluctant

to let banks fail. Therefore, it has tended to take over the failed

bank, with the resultant pressure on the fiscal deficit. Better

enforced prudential regulations would considerably

strengthen the case for private sector banks. On the other hand,

public sector banks may also fail on account of corrupt

management practices and inertia on the part of the lenders.

Historically, in India, priority sector lending marks the

crucial difference between public and private sector banks. The

share of priority sector lending from public sector banks was

42.5 percent in 2003, up from 36.6 percent in 1995. Private sector

lending has shown a similar increase from its 1995 level of 30

percent. In 2003 it surpassed the public sector lending for the

first time ever with a share of net bank credit to the priority

sector at 44.4 percent. However there remains a consistent

failure of private sector banks to meet the agricultural lending

sub target, though they also lend substantially less in rural

areas. Evidence suggests that privatization will make it harder

for the government to get the private banks to comply with the

objective of priority lending.

In what follows we proceed to the case study with a simple

analysis of the major financial indicators of the banking sector

and their trends with respect to some banks. Few critical

indicators have been chosen and the performance of three

banks has been analyzed. The banks have been chosen from the

high-cap genre with one bank for each of the public, private

and foreign sectors. The banks considered are: SBI: Public

sector bank; ICICI: Private sector bank; Barclays Plc: Foreign

bank. The analysis of these three banks will not only help us to

have a complete outlook of the performance of the banking

sector but will also enable us to compare and contrast these

different types of banks. The source of the data is from Capital

Line Database, 2000 for the study period.

In what follows we present a brief overview of the banks

selected for our case study.

STATE BANK OF INDIA: SBI is the largest bank in India.

The bank traces its ancestry to the British India through the

Imperial Bank of India. The Government of India nationalized

the Imperial Bank of India in 1955 with the Reserve Bank of

India having a stake of 60% and renamed it as the State Bank of

India. In 2008, the Government took over the stake held by the

Reserve Bank of India. SBI provides a range of banking

products through its vast network in India and overseas,

including products aimed at NRIs. The State Bank Group, with

over 16000 branches, has the largest branch network in India.

With an asset base of $250 billion and $195 billion in deposits, it

is a regional banking behemoth. It has a market share among

Indian commercial banks of about 20% in deposits and

advances, and SBI accounts for almost one-fifth of the nation’s

loans. The State bank of India is the 29th most reputed

company in the world according to Forbes. It is the only Indian

bank to feature in the top 100 world banks in the Fortune Global

500 rating and various other rankings.

ICICI BANK: It is India's largest private sector bank by

market capitalization and second largest overall in terms of

assets with total assets of Rs. 3,562.28 billion (US$ 77 billion) at

December 31, 2009 and profit after tax Rs. 30.19 billion (US$

648.8 million) for the nine months ended December 31, 2009.

The Bank also has a network of more than 1,640 branches (as on

February 11, 2010) and about 4,721 ATMs in India and present

in 18 countries, as well as some 24 million customers (at the end

of July 2007). ICICI Bank is also the largest issuer of credit cards

in India.

ICICI Bank has got its equity shares listed on the stock

exchanges at Kolkata and Vadodara, Mumbai and the National

Stock Exchange of India Limited, and its ADRs on the New

York Stock Exchange (NYSE). The Bank is expanding in

overseas markets and has the largest international balance

sheet among Indian banks.

The bank made headlines during the sub-prime crisis. It

was reported to suffer a loss of $0.264 billion during this period

and was the only Indian bank which came into the spotlight

due to the crisis, one of the definite reasons for this being a

choice for the case-study.

BARCLAYS PLC: It is a British financial services firm

operating worldwide. It is a holding company that is listed on

the London and New York stock exchanges, and was listed on

the Tokyo Stock Exchange until 2008. It is also a constituent of

the FTSE 100 Index. Barclays PLC is ranked as the 25th largest

company in the world by Forbes Global 2000 (2008 list).

According to Datamonitor, by market share, Barclays is the

largest financial services provider globally with $3.7 trillion of

assets. It is the second largest bank in the United Kingdom and

the world based on asset size. Its share price fell by 90% in the

year to 23 January 2009, but has recovered substantially,

leaving it higher as of 3 September 2009 than it had been a year

before. In March 2007 Barclays announced plans to merge with

ABN AMRO, the largest bank in the Netherlands. However, on

5 October 2007 Barclays announced that it had abandoned its

bid, citing inadequate support by ABN shareholders. To help

finance its bid for ABN AMRO, Barclays sold a 3.1% stake to

China Development Bank and a 3% stake to Temasek

Holdings, the investment arm of the Singaporean government.

RATIO ANALYSIS

A ratio is defined as “the relationship between two or

more things”. In financial analysis, a ratio is used as a

benchmark for the purpose of evaluating the financial position


Banks’ Ownership Structure and Their Performance: A Case Study 75

and performance of a firm. The absolute accounting figures as

reported in the financial statements do not provide any

meaningful understanding of the performance and financial

position of a firm. The relationship between two accounting

figures expressed mathematically, is known as a financial ratio.

Ratios help to summarize the large quantity of financial data

and to make qualitative judgments about the firm’s financial

performance. This is precisely what the paper attempts in order

to study the causality between banks’ performance vis-à-vis its

ownership structure.

In our analysis we take into consideration the performance

indicators of the selected banks as Return on Equity (ROE),

Return on Assets (ROA), The Profit Rate (PR), Rate of Asset

Utilization (RAU), Percentage of Net Non-performing Assets

(NNPA), Percentage of Capital Adequacy Ratio (CAR),

Percentage of Interest Income (II) and the Percentage of

Operating Profit (OP). We take a closer look at some of these

indicators.

1. RETURN ON EQUITY (ROE): We define return on equity

as the percentage of net earnings to total equity.

The following figure represnts the ROE of the selected

banks. Clearly, the return on equity is highly volatile for the

foreign bank compared to the public sector bank.

Figure 1.1: The trend in Return on equity

Data Source: Capital Line Database, 2000.

2. RETURN ON ASSETS (ROA): This is defined as the

percentage of net profits to the total assets of the bank.

Here the private sector bank shows wide variation in

return on assets compared to public sector bank and the

foreign bank.

-15

-10

-5

0

5

10

15

20

25

Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09

RO

E

Mar/99 Mar/00 Mar/01 Mar/02 Mar/03 Mar/04 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09

SBI 10.27 18.2 12.53 16.95 19.15 19.67 19.43 17.04 15.41 16.75 17.05

ICICI 22.03 14.45 13.09 6.53 17.38 20.93 18.86 14.33 13.17 11.63 7.77

BARCLAYS 2.53 -12.8 11.21 7.85 11.97 19.43 11.32 11.75 6.57 0.2 0.61

Trend In ROE

-4-202468

10


RO

A

Mar/99

Mar/00

Mar/01

Mar/02

Mar/03

Mar/04

Mar/05

Mar/06

Mar/07

Mar/08

Mar/09

SBI 0.51 0.85 0.56 0.73 0.86 0.94 0.99 0.92 0.86 1.04 1.08

ICICI 0.38 -1.81 1.55 2.3 4.23 8.06 7.34 8.67 3.64 0.08 0.18

BARCLAYS 1.23 1.11 1.01 0.41 1.13 1.4 1.36 1.21 1.04 1.12 0.96

Trend in ROA

Figure 1.2: The trend in Return on assets

Data Source: Capital Line Database, 2000


3. THE PROFIT RATE (PR): We define the profit rate as the

percentage of net profit from the total income of the bank.

The figure below demonstrates wide variation in the

profit rate for the foreign bank compared to their

counterpart.


Figure 1.3: The trend in the Profit rate


-30

-20

-10

0

10

20

30

40

50

PR

Mar/99

Mar/00

Mar/01

Mar/02

Mar/03

Mar/04

Mar/05

Mar/06

Mar/07

Mar/08

Mar/09

SBI 4.59 7.8 5.32 6.93 8.39 9.53 9.17 10 10.65 11.49 11.85

ICICI 9.87 10.06 10.97 9.18 -0.02 13.29 14.54 12.9 10.04 9.91 8.51

BARCLAYS -1.98 -17.32 -1.43 16.24 21.55 40.19 40.6 42.27 20.16 0.13 1.15

Trend in PR

4. RATE OF ASSETS UTILIZATION (RAU): The

dimension of this indicator depends on the active interest

measured on market and the banking assets structure. The

indicator is defined as a ratio between the total operational

income and the assets total, illustrating the total incomes

obtained from assets utilization (incomes from interests,

commissions, taxes). The figure below amply

demonstrates better performance in rate of asset

utilization from the perspective of the private bank, while

the foreign and public sector banks’ rate of asset

utilization is more or less stable over the time period.

0

5

10

15

20

25


RA

U

Mar/99 Mar/00 Mar/01 Mar/02 Mar/03 Mar/04 Mar/05 Mar/06 Mar/07 Mar/08 Mar/09

SBI 11 11 10 10 10 10 9 9 8 9 9

ICICI 18 10 12 14 15 18 19 21 16 15 16

BARCLAYS 13 11 9 4 12 10 9 9 10 11 10

Trend in RAU

Figure 1.4: The trend in RAU

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011

SBI

ICICI

Barclays

Capital Adequacy ratio(%)

77Banks’ Ownership Structure and Their Performance: A Case Study

possible explanation for such a trend can be posited in

terms of stringent regulatory guidelines for the public

sector banks. Interestingly, the corresponding figure for

the foreign banks increased sharply after 2008, possibly

because of the sub-prime crisis.

5. NET NON-PERFORMING ASSETS: The percentage of

net non-performing assets for the selected banks is

depicted in the following figure. Clearly, to begin with the

public sector bank started with a greatest percentage of

NNPA, this however, declined steadily over the years. A


Figure 1.5: The trend in NNPA

0

1

2

3

4

5

6

7

8

1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011

SBI

ICICI

Barclays

Net NPA (%)

public and private sector banks.6. CAPITAL ADEQUACY RATIO: The CAR figures show

wide dispersion for the foreign bank compared to the


Figure 1.6: The trend in Capital Adequacy ratio

foreign bank depicts high fluctuations which have tended

to ease out after 2009.

7. OPERATING PROFIT: The figure below shows that,

since 2001 there is a gradual rise in the operating profit for

the public sector bank. The corresponding figure for the


Now in what follows we present the descriptive statistics

of different performance indicators of the selected banks.

enjoys the confidence of the masses from the point of view of

security and less risky entity.

REFERENCES

• Bhaduri, S.N. and Shanmugam, K.R. (2008): Ownership and

Performance of the Indian Banking Industry, Journal of South

Asian Development, Vol. 3, No. 2, 237-252.

• Caves, D.W. and Christensen. L.R. (1980): Flexible Cost

Functions for Multiproduct Firms. The Review of Economics

and Statistics. Vol. 62, No. 3, 477-481.

• Davies, D.G. and Brucato, P. F. Jr. (1987): Property Rights and

Transaction Costs: Theory and Evidence from Privately-Owned

and Government-Owned Enterprises. Journal of Institutional

and Theoretical Economics, 143, 1, 7-22.

• de Alessi, L. (1980): The Economics of Property Rights: A

Review of the Evidence. in Richard O. Zerbe Ed. Research In

Law and Economics: A Research Manual, Volume 2, 1-47,

Greenwich, CT, Jai Press.

• De, V. (2003): Ownership Effects On Bank Performance: A

Panel Study Of Indian Banks. Paper presented at the Fifth

Annual Conference on Money and Finance in the Indian

Economy. IGIDR. Mumbai.

• La Porta, R.; Florencio, L.; and Andrei, S. (2000): Government

Ownership of Banks, Harvard Institute of Economic Research

Discussion Paper No. 1890, Harvard University, Cambridge,

MA.

• Levy, B. (1987): A Theory of Public Enterprise Behavior.

Journal of Economic Behavior and Organization, 8, 1, 75-96.

• Nickskamen, W. (1971): Bureaucrats and Politicians. Journal of

Law and Economics, 18, 3, 617-3,643.

• Sabi, M. (1991): Comparative Analysis of Domestic and Foreign

Bank Operations in Hungary. Journal of Comparative

Economics, 22, 2, 179-188.

• Sarkar, J.; Sarkar, S.; Bhaumik, K. (1998): Does ownership

always matter? - Evidence from the Indian banking industry,

Journal of comparative economics, 26: 262-281.

• Umakrishnan, K. U. and Bandyopadhyay, A. (2009): Changing

Income Structure, Ownership and Performance: An Empirical

Analysis of Indian Banking Sector, University of

Witwatersrand, SA, National Institute of Bank Management,

India, Munich Personal RePEc Archive.

0

2

4

6

8

10

12

14

16

18

1997 1998 1999 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2011

SBI

ICICI

Barclays

Operating Profit(%)


Figure 1.7: The trend in Operating Profit

Table 2: Performance Indicatorsof the selected banks

From the results obtained in this case study, the values of

standard deviation and coefficient of variation for each of the

banks show that the foreign banks are more vulnerable to

economic shocks. This calls for more efficient regulation of the

financial sector. On the other hand, the public sector banks still

Performance

Indicators

SBI ICICI BARCLAYS

ROE

Mean 16.58 14.56 6.42

s.d 2.91 4.96 8.57

ROA

Mean 0.84 1.08 3.14

s.d 0.18 0.26 3.56

PR

cv 27.30 38.21 138.18

RAU

Mean 9.63 9.81 15.81

s.d 0.92 2.31 3.15

NNPA

sd 3.52 1.11 1.76

CAR

sd 0.99 3.07 14.42

II

Mean 8.47 10.90 34.67

sd 2.23 1.61 4.13

OP

Mean 4.30 4.80 12.33

sd 0.64 0.68 6.21


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Did Not Read

5. An Emprical Study on People’s Perception of Benefit of Cause Related

Marketing to Commercial and Non Commercial Organisations

6. A Study on The Credit Risk Management Framework at Banks

in Coimbatore Region


SAMIKSHA

1. A Study on Marketing Innovations at Bottom of Economic Pyramid

2. An Empirical Study on Employees Satisfaction at Workplace

in BPO companies of Odisha

3. A Study of Derivatives Trading in India: Apropos to The Recessionary Forces

4. Impact of work culture on performance-A life study at Ester Industries Limited

7. Aligning HR with Business Goals

8. A study on selection criteria of Bank credit card with special reference

to Kanpur city

9. Performance of Foreign Banks in India: An Assessment

10. Banks’ Ownership Structure and Their Performance: A Case Study

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