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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
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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
Journal of UIM Allahabad is published bi-annually. All edition correspondence and article for publication should be addressed to the Editor Samiksha at United
Institute of Management, UPSIDC Industrial Area, Naini Allahabad U.P.
Views expressed in the article are those of the respective authors. Neither Journal (Samiksha) of UIM Naini nor the Institute can accept any responsibility for, nor
do they necessarily agree with the view expressed in the articles. All the copyrights are respected. Every effort is made to acknowledge source material relied upon
or referred to, but ‘UIM’ does not accept any responsibility for any inadvertent omissions.
Except as authorized, no part of the material published in The Journal ‘Samiksha’ may be reproduced, or stored in retrieval systems, or used for commercial or
other purposes. All the Rights are reserved.
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
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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
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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
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*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*
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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
Page 7
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.
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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
04 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 9
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
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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
Page 11
*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**
Page 12
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.
08 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 13
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
Page 14
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.
10 SAMIKSHA - Volume III, No. 1, January-June 2012
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
Page 15
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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Page 16
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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*
Page 18
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.
14 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 19
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*
Source: Compiled and calculated from NIFTY index
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))
Source: Compiled and calculated from NIFTY index
Page 20
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
16 SAMIKSHA - Volume III, No. 1, January-June 2012
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))
Source: Compiled and calculated from NIFTY index
Page 21
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))
Source: Compiled and calculated from NIFTY index
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
Page 22
18 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
REFERENCES
1. Bodla, B. S. and Jindal, K. (2008), „Equity Derivatives in India:
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,
Hong Kong and Japan”, Journal of Futures Markets, pp.689-
705.
7. Koutmas, G. and Tucker, M. 1996, “Temporal Relationship and
Dynamic Interactions Between Spot and Futures Stock
Markets”, Journal of Futures Markets, 16.pp.55-69.
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
models with time-dependent conditional variances, Journal of
Econometrics, Volume 52, 1992, p. 91-113.
11. Nelson, D. B., Cao C. Q., Inequality Constraints in the
Univariate GARCH Model, Journal of Business and Economic
Statistics, 1992, 229-35.
12. Hogson, A. and Nicholls, D. 1991, “The Impact of Index Futures
Market on Australian Share Market Volatility”, Journal of
Business Finance and Accounting, 18, pp.267-280.
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
Source: Compiled and calculated from NIFTY index
Page 23
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
15. Brenner, M, Subramanyam, M. and Uno, J. 1989, “The
Behaviour of Prices in the Nikkei Spot and Futures Market”,
Journal of Financial Economics, pp.363-384.
16. Shenbagaraman P: Do Futures and Options trading increase
stock market volatility? NSEWorking Papers, 2003,
http://www.nseindia.com/content/research/Paper60.pdf
17. Thenmozhi M : Futures Trading, Information and Spot Price
Volatility of NSE-50 Index Futures Contract, NSE Working
Paper , 2002 , h t tp : / /www.nse ind ia . com/content /
research/Paper59.pdf
19A Study of Derivatives Trading in India: Apropos to The Recessionary Forces
Page 24
*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***
Page 25
• 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
Page 26
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.
22 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 27
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
Impact of work culture on performance-A life study at Ester Industries Limited 23
Page 28
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
24 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 29
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
Impact of work culture on performance-A life study at Ester Industries Limited 25
Page 30
• 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)
Table 3: (a). Mean, S.D
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
Standard Deviation .721
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
26 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 31
Trust (W3)
Table 4: (a). Mean, S.D
Mean 2.98
Standard Deviation .653
Table 4: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 2.7 2.7
Disagree 21.9 24.6
Agree 56.9 81.5
Strongly agree 18.5 100.0
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)
Table 5: (a). Mean, S.D
Mean 2.91
Standard Deviation .710
Table 5: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 1.5 1.5
Disagree 10.0 11.5
Agree 46.2 57.7
Strongly agree 42.3 100.0
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)
Table 6: (a). Mean, S.D
Mean 3.29
Standard Deviation .730
Table 6: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 1.2 1.2
Disagree 18.8 20.0
Agree 60.8 80.8
Strongly agree 19.2 100.0
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)
Table 7: (a). Mean, S.D
Mean 3.01
Standard Deviation .770
Table 7: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 5.0 5.0
Disagree 13.8 18.8
Agree 55.8 74.6
Strongly agree 25.4 100.0
Total 100.0
Impact of work culture on performance-A life study at Ester Industries Limited 27
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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)
Table 8: (a). Mean, S.D
Mean 3.31
Standard Deviation .739
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)
Table 11: (a). Mean, S.D
Mean 2.19
Standard Deviation .804
Table 11: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 3.1 3.1
Disagree 27.7 30.8
Agree 43.8 74.6
Strongly agree 25.4 100.0
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
Table 8: (b). Frequency (%)
Experimentation (W8)
Table 9 (a). Mean, S.D
Mean 3.19
Standard Deviation .628
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 9: (b). Frequency (%)
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
28 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 33
Goal Setting (P2)
Table 12: (a). Mean, S.D
Mean 3.30
Standard Deviation .722
Table 12: (b). Frequency (%)
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)
Table 13: (a). Mean, S.D
Mean 3.06
Standard Deviation .611
Table 13: (b). Frequency (%)
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)
Table 14: (a). Mean, S.D
Mean 3.10
Standard Deviation .699
Table 14: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 1.9 1.9
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)
Table 15: (a). Mean, S.D
Mean 2.93
Standard Deviation .640
Table 15: (b). Frequency (%)
Valid
Percent
Cumulative
Percent
Valid Strongly disagree 1.5 1.5
Disagree 11.2 12.7
Agree 66.9 79.6
Strongly agree 20.4 100.0
Total 100.0
Valid
Percent
Cumulative
Percent
Valid Disagree 24.0 24.0
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.
Impact of work culture on performance-A life study at Ester Industries Limited 29
Page 34
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)
Table 16: (a). Mean, S.D
Mean 2.93
Standard Deviation .401
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 16: (b). Frequency (%)
Table 17: Model Summary
Valid
Percent
Cumulative
Percent
Valid Disagree 11.5 11.5
Agree 83.5 95.0
Strongly Agree 5.0
Total 100.0 100.0
Model R R Square
1 .175(a) .031
30 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 35
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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the association between the organizational culture and
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an organization’s culture for work and family: do mentors
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• Gallo, Frank T., Stokely, James R(1998). Positive cultural
change at OSRAM SYLVANIA. Journal of Human
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performance measurement and management systems.
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21 Iss: 7, pp.836 – 853
• Nabiha, A.K. (2010). Performance management system at
Gas Company. Journal of Asian case research, Jun2010,
vol. 14 Issue 1, p95-115, 21p
• Palanisamy, Dr. Parthiban (2011). An integrated
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of benchmarking, Vol. 18 Issue 2 2011.
• Smollan, Roy K., Sayers, Janet G. (2009). Organizational
culture, change and emotions: A Qualitative study.
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Impact of work culture on performance-A life study at Ester Industries Limited 31
Page 36
*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***
Page 37
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
Page 38
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.
34 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 39
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
Page 40
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
36 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 41
*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*
Page 42
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.
REVIEW OF LITERATURE
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
38 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 43
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
Page 44
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.
40 SAMIKSHA - Volume III, No. 1, January-June 2012
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
Private 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
Private 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
Private 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
Private 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%
Page 45
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
Private 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
Private 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:
Page 46
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.
42 SAMIKSHA - Volume III, No. 1, January-June 2012
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
significant values of Direct lending, Guarantees/Letter of
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,
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 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
Private 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%
Page 47
43A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
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 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,
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 preparation for credit quality reports are 0.438,
0.105 & 0.429, 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 RAROC are 0.872, 0.983
& 0.355, 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 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
significance), the alternate hypothesis is rejected. The
significant values of Direct lending, Guarantees/Letter 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 is 5%
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
(RAROC), credit risk model for the evaluation of credit
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
exposure, interbank exposure framework, use of derivatives
and the approach for measuring capital requirement for credit
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
Cross border exposure
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
Cross border exposure
1.051 .384 .052 .822 .545 .585 .422 .659 1.042 .402
*Level of Significance is 5%
Page 48
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 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
significant values of Direct lending, Guarantees/Letter of
credit, Cross border exposure against defined exposure for
managing off-balance sheet exposure are 0.859, 0.459 & 0.822,
which is greater than 0.05 (5% level of significance), the
alternate hypothesis is rejected. The significant values of Direct
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
significant values of Direct lending, Guarantees/Letter of
credit, Cross border exposure against the use of derivatives are
0.858, 0.599 & 0.659, which is greater than 0.05 (5% level of
significance), the alternate hypothesis is rejected. The
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.
44 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
H1: Effectiveness of Securitization Ordinance Act 2002
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.
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
*Level of Significance is 5%
Responsibility for approval of CRP
Technique used for CRM
Credit limit Level of approval committee
Activities of CRM
F Sig. F Sig. F Sig. F Sig. F Sig.
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
technique/instrument used for credit risk management, credit
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,
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 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.
H0: Effectiveness of Securitization Ordinance Act 2002
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: Effectiveness of Securitization Ordinance Act 2002
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.
Page 49
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.
Effectiveness of Securitization Ordinance Act 2002
1.411
.254
1.068
.356
.776
.385
.011
.915
.228
.975
3.443
.020
45A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
From the above table, it is seen that the significant values
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
significance), the alternate hypothesis is rejected. The
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.
*Level of Significance is 5%
off-balance sheet exposure, interbank exposure framework, use of derivatives and the approach for measuring capital requirement for credit risk.
H0: Effectiveness of Securitization Ordinance Act 2002
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: Effectiveness of Securitization Ordinance Act 2002
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
*Level of Significance is 5%
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.
Effectiveness of Securitization Ordinance Act 2002
1.852 .158 .776 .385 .284 .754 .303 .741 .542 .706
From the above table, it is seen that the significant values
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
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: Aspects 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.
Page 50
From the table showing the level of risk, it is seen that 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 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%
level of significance), the alternate 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 technique/instrument used for credit risk
management are 0.772, 0.941, 0.961, 0.558 & 0.794, which is
greater than 0.05 (5% level of significance), the alternate
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
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 level of approval committee are
0.928, 0.947, 0.146, 0.192 & 0.431, which is greater than 0.05 (5%
level of significance), the alternate 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
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
*Level of Significance is 5%
against the activities of credit risk management are 0.241, 0.198,
0.596, 0.578 & 0.29, 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, 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
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: 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.
*Level of Significance is 5%
Responsibility for approval of CRP
Technique used for CRM
Credit limit Level of approval committee
Activities of CRM
F Sig. F Sig. F Sig. F Sig. F Sig.
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
credit quality reports
RAROC Credit risk model
Interval for loan policy
F Sig. F Sig. F Sig. F Sig. F Sig. F Sig.
Stipulate Benchmark
1.642 .190 .759 .477 1.178 .286 1.752 .195 .870 .542 .244 .911
Single/Group borrower limits
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
46 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 51
47A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
From the table showing the level of risk, it is seen that 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 metrics used for rating in the bankare 0.19, 0.059,
0.385, 0.451 & 0.919, which is greater than 0.05 (5% level of
significance), the alternate 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 interval for credit risk assessment are 0.477, 0.737,
0.919, 0.211 & 0.676, which is greater than 0.05 (5% level of
significance), the alternate 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 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
significance), the alternate 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 RAROC are 0.286, 0.686, 0.228, 0.846 & 0.449, which is
greater than 0.05 (5% level of significance), the alternate
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 credit risk model for the evaluation
of credit portfolio are 0.542,0.296, 0.518, 0.084 & 0.533, which is
greater than 0.05 (5% level of significance), the alternate
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 interval for loan policy are
0.911, 0.91, 0.643,0.534 & 0.713, which is greater than 0.05 (5%
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
(RAROC), credit risk model for the evaluation of credit
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
exposure, interbank exposure framework, use of derivatives
and the approach for measuring capital requirement for credit
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
*Level of Significance is 5%
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.
Stipulate Benchmark
.567 .641 2.022 .164 .135 .874 .474 .627 8.699 .000
Single/Group borrower limits
.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
From the table showing the level of risk, it is seen that the
significant values of Stipulated benchmark for ratios,
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
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 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
Page 52
significant values of Stipulated benchmark for ratios,
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
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: Factors for pricing 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.
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
*Level of Significance is 5%
48 SAMIKSHA - Volume III, No. 1, January-June 2012
Responsibility for approval of CRP
Technique used for CRM
Credit limit Level of approval committee
Activities of CRM
F Sig. F Sig. F Sig. F Sig. F Sig.
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
Perceived value of accounts
.468 .758 1.023 .478 .313 .733 .708 .665 1.396 .240
Future Business Potential
1.161 .348 .663 .793 .018 .982 .400 .894 1.050 .438
Portfolio Industry Exposure
.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
From the table showing the level of risk, it is seen that 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 responsibility for approval of credit risk policy are
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
(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 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
significant values of Portfolio quality, Value of collateral,
Market forces, Perceived value of accounts, Future Business
Potential, Portfolio industry exposure and strategic reasons
Page 53
49A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
against the activities of credit risk management are 0.922, 0.084,
0.24, 0.438, 0.088 & 0.592, which is greater than 0.05 (5% level of
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
portfolio and the interval for loan policy.
H1: Factors for pricing 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 2.11: 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),
credit risk model for the evaluation of credit portfolio and the interval for loan policy.
*Level of Significance is 5%
From the table showing the level of risk, it is seen that the
significant values of Portfolio quality, Value of collateral,
Market forces, Perceived value of accounts, Future Business
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.
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 credit risk model for the evaluation of credit portfolio
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,
0.457, 0.86, 0.887, 0.543 & 0.62, which is greater than 0.05 (5%
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.
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
Perceived value of accounts
1.200 .331 1.687 .201 .255 .617 1.873 .180 1.904 .108 .323 .860
Future Business Potential
1.715 .173 .902 .416 1.999 .167 .055 .815 .654 .708 .283 .887
Portfolio Industry Exposure
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
Page 54
level of significance), the alternate hypothesis is rejected.
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-
balance sheet exposure, interbank exposure framework, use of
derivatives and the approach for measuring capital
requirement for credit risk.
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
derivatives and the approach for measuring capital
requirement for credit risk.
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
*Level of Significance is 5%
50 SAMIKSHA - Volume III, No. 1, January-June 2012
From the table showing the level of risk, it is seen that the
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,
0.251, 0.518 & 0.254, which is greater than 0.05 (5% level of
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
Potential, Portfolio industry exposure and strategic reasons
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,
0.315, 0.589, 0.397, 0.527 & 0.579, which is greater than 0.05 (5%
level of significance), so 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 use of derivatives are 0.678, 0.572, 0.544, 0.694,
0.897, 0.906 & 0.871, which is greater than 0.05 (5% level of
significance), so the alternate hypothesis is rejected. The
significant values of Portfolio quality, Value of collateral,
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.
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.
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
Perceived value of accounts
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
Portfolio Industry Exposure
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
Page 55
51A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
H0: Aspects for evaluating bank wise exposure 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: Aspects for evaluating bank wise exposure 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.
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
*Level of Significance is 5%
From the table showing the level of risk, it is seen that 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 responsibility for approval of credit risk policy are
0.979, 0.986, 0.90, 0.909, 0.729 & 0.68, 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 technique/instrument used for credit
risk management are 0.771, 0.131, 0.276, 0.301, 0.516 & 0.413,
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 credit limit for
seeking credit approval committee are 0.875, 0.740, 0.285, 0.547,
0.718 & 0.268, 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 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
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 activities of credit risk management are 0.928, 0.87,
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 of credit risk policy, technique/instrument used for
credit risk management, credit limit for seeking credit
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.
H0: Aspects for evaluating bank wise exposure 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: Aspects for evaluating bank wise exposure 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.
Responsibility for approval of CRP
Technique used for CRM
Credit limit Level of approval committee
Activities of CRM
F Sig. F Sig. F Sig. F Sig. F Sig.
Study of financial performance
.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
Bank rating on credit quality
.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
Page 56
From the table showing the level of risk, it is seen that 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 metrics used for rating in the bankare 0.905, 0.497,
0.539, 0.857, 0.85 & 0.797, 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 credit risk assessment are 0.808, 0.349,
0.329, 0.899, 0.463 & 0.96, 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, 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,
which is greater than 0.05 (5% level of significance), but the
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
quality, past experience, bank rating on credit quality and
internal matrix for counter party risk are 0.454, 0.255, 0.119,
0.87, 0.83 & 0.17, 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 credit risk model for the evaluation of credit portfolio
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
0.90, 0.875, 0.798, 0.546, 0.334 & 0.793, which is greater than 0.05
(5% 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
(RAROC), credit risk model for the evaluation of credit
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.
H0: Aspects for evaluating bank wise exposure 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 for evaluating bank wise exposure 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 2.14: 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),
credit risk model for the evaluation of credit portfolio and the interval for loan policy.
*Level of Significance is 5%
52 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
Study of financial performance
.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
Page 57
53A Study on The Credit Risk Management Framework at Banks in Coimbatore Region
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
*Level of Significance is 5%
From the table showing the level of risk, it is seen that the
significant values of Study of financial performance, operating
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
significant values of Study of financial performance, operating
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,
which is greater than 0.05 (5% level of significance), but the
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
quality, past experience, bank rating on credit quality and
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
quality, past experience, bank rating on credit quality and
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,
0.334 & 0.429, which is greater than 0.05 (5% level of
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.
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.
Study of financial performance
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
Bank rating on credit quality
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
Page 58
• 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.
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A Study on The Credit Risk Management Framework at Banks in Coimbatore Region 55
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Page 60
*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
Page 61
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
Page 62
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)
58 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 63
*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*
Page 64
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
60 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 65
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Repayment time period
Page 66
0
20
40
60
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Flexibility repayment dates
01020304050
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
No annual fee
0
10
20
30
40
50
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Cash back bonus
0
10
20
30
40
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Low payment charges
Repayment time period is an important criterion that
affects the purchase of credit cards. Nearby 60% customers
agree to this point.
62 SAMIKSHA - Volume III, No. 1, January-June 2012
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Low-interst rate
0
10
20
30
40
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Low monthly service charges
01020304050
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Convenient
80% of customers considered balance EMI conversion for
debit amount as important factor affecting their purchase
decision.
Page 67
0
20
40
60
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Security while online transaction
0
20
40
60
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Security while transaction
0
10
20
30
40
50
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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.
80% of customers considered balance EMI conversion for
debit amount as important factor affecting their purchase
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Length of promotional offer
0
20
40
60
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Consolidating debts
01020304050
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Timing (Receiving of debts)
01020304050
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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
DISAGREE NEUTRAL AGREE STRONGLY AGREE
Points/reward scheme
0
10
20
30
40
50
STRONGLY DISAGREE
DISAGREE NEUTRAL AGREE STRONGLY AGREE
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.
Page 68
64 SAMIKSHA - Volume III, No. 1, January-June 2012
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
Page 69
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
Page 70
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.
66 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
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the Islamic credit cards holders’ satisfaction. The Business
Review
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perspective. J. Market. Manage, 11, 133-149
• Barker T, Sekerkaya A (1992). “Globalization of Credit Card
Usage: The Case of a Developing Economy”, Int. J. Bank Mark,
10(6): 27-31.
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Credit Card Usage Patterns”, J. Retail Bank, 8(1): 9-18.
• Gan LL, Maysami CR (2006). “Credit Card Selection Criteria:
Singapore Perspective”, Economic Growth Centre, working
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Conference, Singapore, 7-8 August.
Page 71
*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**
Page 72
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.
REVIEW OF LITERATURE
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,
68 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 73
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%).
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70 SAMIKSHA - Volume III, No. 1, January-June 2012
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
3 Standard Chartered Bank
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
9 JP Morgan Chase Bank
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
(Source: Annual Reports of Respective Banks, CAR according to Basel-I)
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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
3 Standard Chartered Bank
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
9 JP Morgan Chase Bank
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
(Source: Annual Reports of Respective Banks, CAR according to Basel-I)
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
(Source: Annual Reports of Respective Banks, CAR according to Basel-I)
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72 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
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• 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.
Page 77
*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*
Page 78
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
74 SAMIKSHA - Volume III, No. 1, January-June 2012
Page 79
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
Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09
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
Page 80
76 SAMIKSHA - Volume III, No. 1, January-June 2012
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.
Data Source: Capital Line Database, 2000
Figure 1.3: The trend in the Profit rate
Data Source: Capital Line Database, 2000
-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
Jan/99 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09
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
Page 81
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
Data Source: Capital Line Database, 2000
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
Data Source: Capital Line Database, 2000
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
Page 82
78 SAMIKSHA - Volume III, No. 1, January-June 2012
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(%)
Data Source: Capital Line Database, 2000
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
Page 83
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Volume III, No. 1, January - June 2012
SAMIKSHA
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10. Banks’ Ownership Structure and Their Performance: A Case Study
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United Institute of ManagementA/16, UPSIDC Industrial Area, Naini, Allahabad (U.P.)
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Fax- 0532-2687142
E-mail : [email protected]
[email protected]
Website: www.united.ac.in
UNITEDGroup of InstitutionsAllahabad • Greater Noida