Banking Industry Revised

8/12/2019 Banking Industry Revised

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1.1. HISTORY OF BANKING

The History of Banking begins with the first prototype banks of merchants of the ancient

world, which madegrain loans to farmers and traders who carried goods between cities. This

began around 2000 BC in Assyria and Babylonia. Later, in ancient Greece and during the

Roman Empire, lenders based in temples made loans and added two important innovations:

they accepted deposits and changed money. Archaeology from this period in ancient China

andIndia,also shows evidence of money lending activity.

Banking, in the modern sense of the word, can be traced to medieval and early Renaissance

Italy, to the rich cities in the north such as Florence, Venice and Genoa. The Bardi and

Peruzzi families dominated banking in 14th century Florence, establishing branches in manyother parts ofEurope.Perhaps the most famous Italian bank was theMedicibank, established

by Giovanni Medici in 1397.

The development of banking spread from northern Italy through Europe and a number of

important innovations took place in Amsterdam during the Dutch Republic in the 16th

century, and in London in the 17th century. During the 20th century, developments in

telecommunications and computing caused major changes to banks operations and let banks

dramatically increase in size and geographic spread. The Late-2000s financial crisis caused

many bank failures, including of some of the world's largest banks, and much debate about

bank regulation.

1.1.2. Origin of bank

The word bank was borrowed in Middle English from Middle French banque, from Old

Italian banca, from Old High German banc, bank "bench, counter". Benches were used as

desks or exchange counters during theRenaissancebyFlorentinebankers, who used to make

their transactions atop desks covered by green tablecloths.

One of the oldest items found showing money-changing activity is a silver Greek drachm

coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon,c. 350325

BC, presented in theBritish Museum in London. The coin shows a banker's table laden with
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coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza

means both a table and a bank.

1.1.3. Origin of banking in India

In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC). Later

during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which

was an order on a banker desiring him to pay the money of the note to a third person, which

corresponds to the definition of a bill of exchange as we understand it today. During the

Buddhist period, there was considerable use of these instruments. Merchants in large towns

gave letters of credit to one another.

1.1.4. Definition of banking

Generally we can say that a bank is a financial institution and a financial intermediary that

accepts deposits and channels those deposits into lending activities, either directly or through

capital markets. A bank connects customers that have capital deficits to customers with

capital surpluses.

The definition of a bank varies from country to country. Under English common law, a

banker is defined as a person who carries on the business of banking, which is specified as:

Conductingcurrent accounts for his customers

Payingcheques drawn on him, and

Collectingcheques for his customers.

In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in

relation to negotiable instruments, including cheques, and this Act contains a statutory

definition of the term banker: banker includes a body of persons, whether incorporated or not,

who carry on the business of banking'. Although this definition seems circular, it is actually

functional, because it ensures that the legal basis for bank transactions such as cheques does

not depend on how the bank is organized or regulated
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The business of banking is in manyEnglish common law countries not defined by statute but

by common law. In other English common law jurisdictions there are statutory definitions of

the business of banking or banking business. When looking at these definitions it is important

to keep in mind that they are defining the business of banking for the purposes of the

legislation, and not necessarily in general. In particular, most of the definitions are from

legislation that has the purposes of entry regulating and supervising banks rather than

regulating the actual business of banking. However, in many cases the statutory definition

closely mirrors the common law. Examples of statutory definitions:

"banking business" means the business of receiving money on current or deposit

account, paying and collecting cheques drawn by or paid in by customers, the making

of advances to customers, and includes such other business as the Authority may

prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2,

Interpretation).

"banking business" means the business of either or both of the following:

1. Receiving from the general public money on current, deposit, savings or other similar

account repayable on demand or within less than 3 months or with a period of call or

notice of less than that period.

2. Paying or collecting checks drawn by or paid in by customers.

Since the advent ofEFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit,direct

debit and internet banking, the cheque has lost its primacy in most banking systems as a

payment instrument. This has led legal theorists to suggest that the cheque based definition

should be broadened to include financial institutions that conduct current accounts for

customers and enable customers to pay and be paid by third parties, even if they do not pay

and collect cheques.
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1.2. GLOBAL BANKING INDUSTRY

The financial services sector is emerging from the worst financial crisis for 80 years. Tighter

regulation, an overhang of debt in the west and the immense growth in the power of banks in

emerging economies will transform the landscape of banking. What opportunities and threats

will this create? And what are the main lessons that banks will learn from the crisis?

There is growing optimism that both the world economy and the banking industry are

recovering from the impact of the financial crisis. But the financial world has changed

permanently, both in terms of the balance of power within the industry and how banks will be

allowed to operate in future. Banks in emerging markets are now well capitalized and well-

funded and big enough to compete directly against their western counterparts in the global

marketplace. They have greater potential for growth because of the relatively immature

development of their domestic financial markets and their rapidly growing economies. But

regulation will become an issue in the emerging markets just as it is in the more established

western markets and may result in a return to more traditional business models.

However, the regulatory environment will differ greatly from one country to the next. The

stronger role of national governments within banking means the future model for banking and

corporate governance is likely to be a hybrid of a regulated free market approach and so-called state capitalism. A key challenge lies in the dichotomy that financial markets are

increasingly global while regulators are predominantly national. Greater international co-

operation will therefore be needed to improve the stability of the global financial system. The

dominant role of the US dollar and of the US banks is set to give way to a world where other

countries, their currencies, their capital markets and banks, all play a greatly enhanced role.

This structural shift will offer both opportunities and threats. Perhaps the biggest lesson from

the crisis is that banks all around the world have learnt that they must co-operate more.

The financial crisis has demonstrated the need for banks to understand their business models

together with the associated risks and to have confidence that performance indicators and

executive incentives reinforce desired behaviours. Through their skills in providing high

quality business information, management accountants should be at the forefront of meeting

this need and thus contributing to the long-term sustainable success of their organizations.


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1.2.1. Introduction:

The global financial system suffered a profound and traumatic shock in September 2008

when US investment bank Lehman Brothers collapsed. As market players withdrew from the

financial system, credit dried up and world trade collapsed, there was a real and immediate

fear that the world was heading for a repeat of the Great Depression of the 1930s. Two years

on and there is growing optimism that both the world economy and the banking industry are

recovering from the impact of the financial crisis. But it is equally clear that the financial

world has changed permanently, both in terms of who holds the balance of power within

global industry and how banks will be allowed to operate in future.

1.2.2. Global shifts in banking:

While the growing power of emerging markets is a long-term structural phenomenon, it has

accelerated in the banking industry thanks as much to the relative decline of the west as to

expansion in the east. There has been a pronounced shift from west to east and, to some

extent, from north to southin the wake of the crisis. Banks on both sides of the Atlantic are

expected to have written down more than $2.1trn of assets by the end of 2010, according to

the International Monetary Fund. The equivalent figure for Asian banks is just $115bn.1

Banks in emerging markets are now well capitalized and well-funded and big enough to be

able to compete directly against their western counterparts in the global marketplace. The two

largest banks by market capitalization are both Chinese ICBC and China Construction

Bank. Although third place is taken by a British bank, HSBC, it is largely an Asian

operation.2 A league table, compiled by Bloomberg in April, shows that City, once the

worlds largest bank, comes in at fifth, while banks from Brazil, Russia and India the other

members of the BRIC grouping alongside Chinaare all in the top 25. Stephen Green, Group

Chairman of HSBC, referred to this trend just a month after the collapse of Lehman, when he

said there was a long-term shift towards Asia and the Middle East. It is this shift that w ill

affect financial markets most profoundly, he told a global financial summit in Dubai. The

rapid growth of emerging markets does not signal an absolute decline in the economies of

mature nations. The pie will grow. But it does entail a loss of share the developed world

will have a smaller share of a larger pie. The rise of China is the most obvious feature of this

shift. Chinas banking market is dominated by the big four state owned commercial banks,of which three are listed on the Shanghai stock market. As well as ICBC, the worlds largest


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bank, there is Bank of China, the countrys foreign exchange and trade finance bank and

China Construction Bank, which specialises in infrastructure projects. The last one and the

only one still in full state control is the Agricultural Bank of China, which is gearing up for a

flotation in 2010. The key role of the state in investment banking is also evident in India,

where three quarters of the banking sector is in government hands.

The State Bank of India alone controls about one quarter of the market. The countrys largest

private sector bank and second biggest lender is ICICI Bank, which is 23rd in the global

table. HDFC Bank is another significant private bank. But this is not just an Asian story.

Brazil has three out of the top 25 global banks: Ita Unibanco is the pre-eminent private bank

and seventh in the global league table, just ahead of rival Bradesco, while state owned Banco

do Brasil is 15th. In Russia, the industry is dominated by Sberbank, a state controlled

institution that holds a third of the countrys deposits, and by VTB Bank, which is also in

government ownership. Singapore, Turkey and South Korea also have banks with market

values above $20bn, the cut-off point for the top 25. South Africaoften known as the S in

the BRICS is now a global player thanks to Standard Bank, in which ICBC holds a 20%

stake.

1.2.3. Focus on emerging markets

The interesting question is why these emerging market banks were better able to weather

what is always described as a global financial crisis better than their US and European

counterparts. For many in Asia, the answer is simple, there was no financial crisis in India,

says K.R. Muthu Manickam, Vice-President of Finance at HDFC Bank in India. Andrew

Lockhart, Head of the Banking and Finance Group at Baker & McKenzie Hong Kong, says

Chinese banks were far more insulated than their western counterparts both in terms of direct

exposure and in the impact on their share price. At the time when there was almost paralysis

in the global banking lending market, the Chinese banks were still doing transactions, he

says. These sentiments are echoed in other emerging markets. Alfred Ramosedi, Managing

Director of Ned bank Private Bank, part of South Africas fourth largest bank, says: Banks

here did not get hit by the financial crisis. The impact of the credit crunch and on these

emerging market banks was largely psychological, with many emerging market banks using

the crisis as an opportunity to re-evaluate their growth plans, risk management principles andgovernance. Looking ahead, banks in emerging markets have a greater potential for growth


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because of the relatively immature development of their domestic financial markets.

Consultancy firm McKinsey estimates that 2.2 billion out of the 2.5 billion people globally

who do not use a bank live in Africa, Asia, Latin America and the Middle East.4 This offers

huge potential for expansion based on innovations such as mobile phone banking and

microfinance lending. Bradesco has opened a floating branch on a riverboat on the Amazon

river system, the first of its kind in the world, as well as an outlet in Helipolis, the largest

slum in the Brazilian city of So Paulo. As Noel Gordon, a consultant at Accenture, told The

Economist, while western banks were fiddling with rocket-science finance, emerging

market banks were innovating more productively.5 Even more significant is the rise of the

middle class across emerging markets and a consequent increased demand for credit. As

wage levels increase in industrialising countries, demand for mortgages and consumer loans

for cars and household appliances is likely to increase.

1.2.4. The growth of private banking in South Africa:

Alfred Ramosedi, a fellow of CIMA, is managing director of Ned bank Private Bank, part of

South Africas fourth largest bank. He greatly understands the needs of the emerging middle

class. We target what we call the mass-affluent consumer. The South African market isdifferent from that in the UK. The entry level salary to qualify for private banking here is

about R400,000. The end of apartheid in 1994 led to lots of investment and new jobs. This

meant that many people were earning higher salaries and starting to generate wealth for the

first time in their lives. Mass-affluent customers want to feel special. They dont want to wait

in a queue like everyone else. Theyve worked hard for their money and they e xpect to be

treated well. People in this market will seek good service above all else, so they expect to get

what they pay for or they will make their feelings clear. FinancialManagement, March 2008

Furthermore, emerging market banks are well placed to exploit the marked revival in growth.

According to the World Bank, developing countries will enjoy annual economic growth of

6% over the next three years, compared with 2.2- 2.6% in the OECD area.6 As businesses

find new market opportunities they will need access to corporate finance, which will open up

markets for bond and share issues. Giles Keating, Head of Global Research at Credit Suisse,

say some Asian banks, which are already strong and very large but domestic focused, are


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likely to play a much larger role in intermediating capital flows at the global level. If we

look ahead five years or so, the total number of major banks operating at scale on a truly

global basis may be similar to that of before the crisis, but these banks are likely to be more

evenly spread around the world, with the US and Europe no longer so dominant, he says. He

believes they are likely to be accompanied by rapid growth in a number of second tier banks

in emerging markets around the world, active in intermediating flows into their fast growing

home markets. Given their strong liquidity and high capital adequacy ratios, some analysts

say these emerging market banks are now in a stronger position than their western

counterparts. Chinese banks are starting to lend money to European companies for business

transactions taking place solely in Europe. Banks in Asia have taken the opportunity to

diversify and expand their business in an environment where they have enjoyed a competitive

advantage, says Lockhart

1.2.5. Regulation

But as banks in emerging markets expand and enjoy the growth rates that western banks did

after World War Two, regulation will become an issue in these markets just as it is in the

more established western markets. Banks in the US and Europe suffered immense lossesduring the crisis, partly as a result of excessive risk taking and investment in complex

products that they did not fully understand. Many had to be rescued by national governments,

which have amassed historically high fiscal deficits as a result. Nouriel Roubini, the US

economist who forecasted the crash, estimates that the US government alone has committed

$11trn in the form of recapitalizations, guarantees and insurance, of which $3trn has been

drawn on.

Governments in the west have made it clear that they want tighter global banking regulation

to ensure that such a crisis cannot happen again. Finance ministers of the group of 20

developed and emerging economies have called for: stronger capital and liquidity standards; a

fair and substantial commitment by banks to pay back the cost of government intervention;

and tighter regulation to ensure greater supervision and transparency.8 According to

Deutsche Bank, this new and additional regulation will result in a return to more traditional

business models. Banks will be less able to achieve growth and will, hence, on average also

be less profitable than previously, it said in a research note.9 The Institute of InternationalFinance (IIF) has calculated that the implementation of full regulatory reform will reduce


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GDP in the core area of the US, euro zone and Japan by 3% by 2015, while some 9.7 million

fewer jobs will be created.

However, it is not clear that the new regulatory regime will affect all parts of the world

equally. Regulators in Asia are still very much looking to the west to see how individual

banks and governments rewrite the rules of corporate and banking governance in the light of

the events of 2007-8. Keating at Credit Suisse says the rules will not be adopted uniformly.

As a consequence, the regulatory environment will differ greatly from one country to the

next, he says.12 Governments in emerging markets in Asia, Africa and Latin America are in

a much stronger position as banks in their countries escaped the worst of the crisis. The

stronger role of national governments within banking means the future model for banking and

corporate governance is likely to be a hybrid of a regulated free market approach and so-

called state capitalism. As Andrew Lockhart of Baker & McKenzie says, in China what we

are seeing is pretty active control of the banks, particularly their liquidity ratios, which is

being done on a micro-management basis for reasons related to the overall control of the

economy as opposed to pure prudential regulations of the financial institutions themselves.

Banking executives in emerging markets can feel fortunate that their governments did not

open up the market too widely before the financial crisis. But given their still very traditional

asset portfolio, the desire to understand how to respond to more complicated and complexfinancial products the real money makers is still very strong, and in many instances,

government led. The China Banking Regulatory Commission is actively encouraging the

development of a stronger China derivatives market. Some may argue that it was these

complex financial products that got banks into trouble in the first place, and the development

of more complicated and diverse financial products clearly is not without some inherent

danger. This will mean that emerging market banks and policymakers will be determined to

impose strict rules on banks as their appetite for risk grows to ensure they avoid the wests

mistakes. Edwina Li, Financial Services Partner at KPMG China, says: Chinas regulators

are always looking to see how they can do it better. In many ways, were going to see more

regulation.

Stephen Green of HSBC pointed out in 2008 that as economies became larger and more

sophisticated, they would need fully functioning capital markets to ensure the efficient

allocation of capital. The main challenge lies in the dichotomy that financial markets as

this crisis has demonstratedare increasingly global, while the policymakers and regulationthat governs them remain predominantly national, he said in Dubai. Greater international


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co-operation will be required to place the financial system on a more stable footing. More

recently William Rhodes, a vice chairman of the IIF and a senior adviser to Citi, said that the

introduction of reforms needed to be determined with great care. He said this was the case

not just in the mature industrial countries where it could slow economic recovery, but also in

emerging markets where banks are the most important engines of development and growth.

According to the IIFs own analysis, emerging markets are likely to be less affected by the

regulatory reform than their western counterparts, perhaps adding to the shift in the balance

of power. It found that most emerging market banking systems were relatively well

capitalised and maintained ratios of regulatory capital to risk weighted assets above the

current 8% minimum under the Basel II requirements. But the focus of attention in the

immediate future will be on western banks because, says Josef Ackerman, Chairman of the

boards of both the IIF and Deutsche Bank, they bear the responsibility for contributing to the

crisis.14 He says the onus is on these banks to strengthen their operations and avoid the

deterioration of business practices that characterised the period preceding the crisis. While

regulation will make banks more cautious, proposals announced both by the US and UK to

split up universal banks with both investment and retail functions mean they may become

smaller.

1.2.6. Opportunities for the future

But not all western banks have been left weaker. Spains Santander was a regional bank a

decade ago but is now the third largest developed country bank. It bought several injured UK

banks to add to the Latin American portfolio it has built up. According to Keating, the world

is becoming multipolar in terms of both economics and politics. This is likely to be clearly

reflected in many aspects of the financial system, he says. The dominant role of the dollar

and of the US banks is set to give way to a world in which the US is still important, but in

which other countries, their currencies, their capital markets and their banks, all play a greatly

enhanced role. As with all great changes, this structural shift will offer both threats and

opportunities for investors. As western banks go through painful restructuring, tackle the

problems with toxic assets and in the case of 10ationalized banksget ready for re-entry

into the private sector, emerging market banks are likely to look to each other for Keatings

new opportunities. ICBCs $5.5bn acquisition of a 20% stake in Standard Bank of South

Africa is probably the pre-eminent example. Russias Sberbank has a branch in India and


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Brazils Ita has established a presence in Dubai and Shanghai. In South Africa, FirstRand

has entered into a strategic co-operation with China Construction Bank focused on growth

opportunities in the African continent. And HSBC is looking to acquire a majority stake in

Ned bank, South Africas fourth largest banking group.

1.3. INDIAN BANKING INDUSTRY

Recently, the RBI took a few important steps to make the Indian Banking industry more

robust and healthy. This includes de-regulation of savings rate, guidelines for new banking

licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking

the performance of leading banking sector stocks) has grown at a compounded annual rate of

about 31%. After a very successful decade, a new era seems to have started for the Indian

Banking Industry. According to a Mckinsey report, the Indian banking sector is heading

towards being a high-performing sector

According to an IBA-FICCI-BCG report titled Being five star in productivity road map

for excellence in Indian banking, Indias gross domestic product (GDP) growth will make

the Indian banking industry the third largest in the world by 2025. According to the report,

the domestic banking industry is set for an exponential growth in coming years with its assets

size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of


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USD 1,350 billion (2010). So, before going in its future, lets have a glance at its historical

performance.

1.3.1 Review of the Indian Banking Industry

If we look at 5 years historical performance of different types of players in the banking

industry, public sector bank has grown its deposits, advances and business per employee by

the highest rate 21.7%, 23% and 21.1% respectively. As far as net interest income is

concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic

banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per

employee and profit per employee has been the highest for public sector banks, in absolute

terms, foreign banks have the highest business per employee as well as profit per employee.
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In the last 5 years, foreign and private sector banks have earned significantly higher return on

total assets as compared to their pubic peers. If we look at its trend, foreign banks show an

overall decreasing trend, private banks an increasing trend and Public banks have been more

or less stagnant. The net NPA of public sector bank was also significantly higher than that of

private and foreign banks at the end of FY11, which indicates the asset quality of public

banks is comparatively poor. The Capital Adequacy ratio was also very high for private and

foreign bank as compared to public banks.

In conclusion, we could say that the current position of ROA, Net NPA and CAR of different

kinds of players in the industry indicates that going ahead, public banks will have to face

relatively more problems as compared to private and foreign banks.

After looking at industry performance, lets see how the different pl ayers in the Banking

Industry have performed in the last five years
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The table above indicates that overall the top private banks have grown faster than that of

public banks. Axis Bank, one of the new private sector banks, has shown the highest growth

in all parameters i.e. net interest income, deposits, advances, total assets and book value.

Among public sector banks,Bank of Baroda has been the outperformer in the last five years.
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with the help of new 3G and smart phone technology (mobile usage has grown

tremendously over the years). This can be looked at as branchless banking and so will

also reduce costs as there is no need for physical infrastructure and human resources.

This will help in acquiring new customers, mainly who live in rural areas (though this

will take time due to technology and infrastructure issues). The IBA-FICCI-BCG

report predicts that mobile banking would become the second largest channel of

banking after ATMs.

4. Financial Inclusion Program: Currently, in India, 41% of the adult population

doesnt have bank accounts, which indicates a large untapped market for banking

players. Under the Financial Inclusion Program, RBI is trying to tap this untapped

market and the growth potential in rural markets by volume growth for banks.

Financial inclusion is the delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income groups. The RBI has also taken many

initiatives such as Financial Literacy Program, promoting effective use of

development communication and using Information and Communication Technology

(ICT) to spread general banking concepts to people in the under-banked areas. All

these initiatives of promoting rural banking are taken with the help of mobile banking,

self-help groups, microfinance institutions, etc. Financial Inclusion, on the one side,

helps corporate in fulfilling their social responsibilities and on the other side it is

fueling growth in other industries and so as a whole economy.


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1.3.3. Porters 5 Forces Model for the Indian Banking Industry

1.3.4. Things to be concerned about

1. More stringent capital requirements to achieve as per Basel III: Recently, the RBI

released draft guidelines for implementing Basel III. As per the proposal, banks will

have to augment the minimum core capital after a stringent deduction. The two new

requirementscapital conservative buffer (an extra buffer of 2.5% to reduce risk) and

a counter cyclical buffer (an extra capital buffer if possible during good times) have

also been introduced for banks. As the name indicates that the capital conservative

buffer can be dipped during stressed period to meet the minimum regulatory

requirement on core capital. In this scenario, the bank would not be supposed to useits earnings to make discretionary payouts such as dividends, shares buyback, etc. The
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counter cyclical buffer, achieved through a pro-cyclical buildup of the buffer in good

times, is expected to protect the banking industry from system-wide risks arising out

of excessive aggregate credit growth.

The above table reveals that even under current Basel Norm II, Indian banks follow

more stringent capital adequacy requirements than their international counterparts.

For Indian Banks, the minimum common equity requirement is 3.6%, minimum tier I

capital requirement is 6% and minimum total capital adequacy requirement is 9% as

against 2%, 4% and 8% respectively recommended in the Basel II Norm. Due to this

the capital adequacy position of Indian banks is at comfortable level. So, going ahead,

they should not face much problem in meeting the new norms requirements. But as

we saw earlier, private sector banks and foreign banks have considerable high capital

adequacy ratio, hence are not expected to face any problem. But, public sector banks

are lagging behind. So, the Government will have to infuse capital in public banks to

meet Basel III requirements. With the higher minimum core Tier I capital requirement

of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is expected to come

down.

2. Increasing non-performing and restructured assets: Due to a slowdown in

economic activity in past couple of years and aggressive lending by banks many loans

have turned non-performing. Restructuring of assets means loans whose duration has

been increased or the interest rate has been decreased. This happens due to inability of

the loan taking company/individual to pay off the debt. Both of these have impacted

the profitability of banks as they are required to have a higher provisioning amount


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which directly eats into the profitability. The key challenge going forward for banks is

to increase loans and effectively manage NPAs while maintaining profitability.

3. Intensifying competition: Due to homogenous kind of services offered by banks,

large number of players in the banking industry and other players such as NBFCs,

competition is already high. Recently, the RBI released the new Banking License

Guidelines for NBFCs. So, the number of players in the Indian banking industry is

going to increase in the coming years. This will intensify the competition in the

industry, which will decrease the market share of existing banks.

4. Managing Human Resources and Development: Banks have to incur a substantial

employee training cost as the attrition rate is very high. Hence, banks find it difficult

manage the human resources and development initiatives.

1.3.5. Future Outlook for this Industry

Currently, there are many challenges before Indian Banks such as improving capital

adequacy requirement, managing non-performing assets, enhancing branch sales & services,

improving organisation design; using innovative technology through new channels and

working on lean operations. Apart from this, frequent changes in policy rates to maintain

economic stability, various regulatory requirements, etc. are additional key concerns. Despite

these concerns, we expect that the Indian banking industry will grow through leaps and

bounds looking at the huge growth potential of Indian economy. High population base of

India, mobile banking offering banking operations through mobile phones, financial

inclusion, rising disposable income, etc. will drive the growth Indian banking industry in the

long-term. The Indian economy will require additional banks and expansion of existing banks

to meet its credit needs.


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1.3.6. MoneyWorks4meassessment for few banks

At MoneyWorks4me colour codes are assigned to the 10 YEAR X-RAY and Future

Prospects of the companies, as Green (Very Good), Orange (Somewhat Good)and Red

(Not Good).

The 10 YEAR X-RAY facilitates analysis of the financial performance of the bank

considering the seven most important parameters. A 10 Year period will normally encompass

an entire business cycle. Analyzing the performance over this time frame is essential to

understand how a company has fared during the good as well as bad times. The seven most

important parameters that one needs to look at are Net Interest Income Growth Rate, Total

Income Growth Rate, EPS Growth Rate, Book Value per Share (BVPS) Growth Rate, Returnon Assets (ROA), Net NPA to Net Advances Ratio and Capital Adequacy Ratio.

1.4. BANKING IN GUJARAT

Gujarat is one of the most prosperous states in the Indian Republic. The banking and financial

institutions of Gujarat are also well developed. The banking and financial institutions of

Gujarat provides financial services to its customers. The banking and financial institutions is

under the regulatory authority of the government. Banking and financial institutions in

Gujarat include banks, stock brokers, asset management firms and similar function

businesses.
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The primary function of the banking and financial institutions in Gujarat is to act as

intermediaries between the capital and debt markets. The banking and financial institutions

transfer funds from the retail or institutional investor to those companies which require

funding. The presence of banking and financial institutions in Gujarat ensure the proper flow

of money through the regional economy.

The banking and financial institutions in Gujarat helps you to manage your money better. If

you are in a shopping mood-and ready to paint the town red, then there is no need to carry

wads of cash with you! Simply carry your credit or debit card issued by the bank. The

carriage of these financial instruments ensure that your money remains safe and cannot be

willfully misused!

A partial list of banks in Gujarat are:

ABN AMRO Bank

ANZ Grindlays Bank

Bank Of America

Bank Of Tokyo

Citi Bank

Deutsche Bank

Standard Chartered Bank

Allahabad Bank

Canara Bank

Indian Overseas Bank

Punjab National Bank

Reserve Bank of India

State Bank of India


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HDFC Bank

ICICI Bank

IDBI Bank

Lord Krishna Bank

Syndicate Bank

UCO Bank


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2.1. ICICI BANK

2.1.1. History

ICICI Bank was established in 1994 by the Industrial Credit and Investment Corporation

of India, an Indian financial institution, as a wholly owned subsidiary. The parent company

was formed in 1955 as a joint-venture of the World Bank, India's public-sector banks and

public-sector insurance companies to provide project financing to Indian industry. The bank

was initially known as the Industrial Credit and Investment Corporation of India Bank,

before it changed its name to the abbreviated ICICI Bank. The parent company was later

merged into ICICI Bank.

ICICI Bank launched internet banking operations in 1998.

ICICI's shareholding in ICICI Bank was reduced to 46 percent, through a public offering of

shares in India in 1998, followed by an equity offering in the form of American Depositary

Receipts on theNYSE in 2000. ICICI Bank acquired theBank of Madura Limitedin an all-

stock deal in 2001, and sold additional stakes to institutional investors during 2001-02.

In the 1990s, ICICI transformed its business from a development financial institution offering

only project finance to a diversified financial services group, offering a wide variety of

products and services, both directly and through a number of subsidiaries and affiliates like

ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial

institution from non-Japan Asia to be listed on the NYSE.

In 2000, ICICI Bank became the first Indian bank to list on the New York Stock Exchange

with its five million American depository shares issue generating a demand book 13 times the

offer size.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of

ICICI and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial

Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was

approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of

Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and

the Reserve Bank of India in April 2002.
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2.1.2 Introduction

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93

billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the

year ended March 31, 2012. The Bank has a network of 2,777 branches and 10,021 ATMs in

India, and has a presence in 19 countries, including India.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in

United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International

Finance Centre and representative offices in United Arab Emirates, China, South Africa,

Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches

in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National

Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on

the New York Stock Exchange (NYSE).

2.1.3. Vision And Mission

Vision

To be the leading provider of financial services in India and a major global bank.

Mission

We will leverage our people, technology, speed and financial capital to:

be the banker of first choice for our customers by delivering high quality, world-class

products and services.

expand the frontiers of our business globally.

play a proactive role in the full realisation of Indias potential.

maintain a healthy financial profile and diversify our earnings across businesses and

geographies.

maintain high standards of governance and ethics.

contribute positively to the various countries and markets in which we operate.

create value for our stakeholders.


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2.1.4. Subsidiary Companies

At March 31, 2012, ICICI Bank had 17 subsidiaries as listed:

Domestic Subsidiaries

ICICI Prudential Life Insurance Company Limited

ICICI Lombard General Insurance Company Limited

ICICI Prudential Asset Management Company Limited

ICICI Prudential Trust Limited

ICICI Securities Limited

ICICI Securities Primary Dealership Limited

ICICI Venture Funds Management Company Limited

ICICI Home Finance Company Limited

ICICI Investment Management Company Limited

ICICI Trusteeship Services Limited

ICICI Prudential Pension Funds Management Company Limited

International Subsidiaries

ICICI Bank UK PLC

ICICI Bank Canada


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ICICI Bank Eurasia Limited Liability Company

ICICI Securities Holdings Inc.

ICICI Securities Inc.

ICICI International Limited

2.1.5. Management

Name Designation

K V Kamath Chairman / Chair Person

N S Kannan Executive Director & CFO

Rajiv Sabharwal Executive Director

Homi Khusrokhan Director

Swati Piramal Director

Tushaar Shah Director

Chanda Kochhar Managing Director & CEO

K Ramkumar Executive Director

Sridar Iyengar Director

Arvind Kumar Director

M S Ramachandran Director

V Sridar Director

Source : Dion Global Solutions Limited


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2.1.6. Products And Services

Personal Banking

Deposits

Savings Account

Advantage Deposit

Fixed Deposits

Security Deposits

Recurring Deposits

Tax-Saver Fixed Deposit

Special Savings Account

Life Plus Senior Citizens Savings Account

Young Stars Savings Account

Salary Account

Advantage Woman Savings Account

EEFC Account

Resident Foreign Currency (Domestic) Account

Child Education Plan

Bank@Campus

Privilege Banking

Family Banking

Rural Savings Account

Peoples Savings Account

Self Help Group Accounts

Outward Remittance

Freedom Savings Account

Loans

Home Loans

Personal Loans

Two Wheeler Loans

Car Loans


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Commercial Vehicle Loans

Pre-approved Loans

Loan Against Property

Loans Against Securities

Loan Against Gold Ornaments

Cards

Credit Cards

Debit Cards

Consumer Cards

Commercial Cards Travel Cards

Corporate Cards

Prepaid Cards

Business Cards

Purchase Cards

Distribution Cards

Merchant Services

Investments

ICICI Bank Tax Saving Bonds

Mutual Funds

Senior Citizens Savings Scheme

Government of India Bonds

Foreign Exchange Services

Initial Public Offers (IPO) by Corporates

ICICI Bank Pure Gold

Insurance

Home Insurance

Health Insurance

Health Advantage Plus


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Family Floater

Student Medical Insurance

Personal Accident

Two Wheeler Insurance

Travel Insurance

Individual Overseas Travel Insurance

ICICI Pru LifeState RP

Motor Insurance

Car Insurance

Life Insurance

ICICI Pru LifeTime Gold

NRI Banking

Money Transfer

Bank Accounts

Investments

Property Solutions

Insurance

Loans Against FD

Business banking

Corporate Net Banking

Cash Management

Online Taxes

Trade Services

Custodial Services

FXOnline

SME Services


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2.1.7. Competition

Top 10 Private Sector banks:

Name Last PriceMarket Cap.

(Rs. cr.)

Net Interest

IncomeNet Profit Total Assets

HDFC Bank 634.10 149,755.29 27,286.35 5,167.07 337,909.49

ICICI Bank 1,079.45 124,476.13 33,542.65 6,465.26 473,647.09

Axis Bank 1,222.25 50,665.51 21,994.65 4,242.21 285,627.79

Kotak Mahindra 620.70 46,147.92 6,180.24 1,085.05 65,666.46

IndusInd Bank 362.70 17,048.00 5,359.20 802.61 57,596.07

Yes Bank 399.35 14,242.73 6,307.35 976.99 73,662.12

Federal Bank 488.10 8,348.83 5,558.39 776.79 60,626.78

ING Vysya Bank 465.60 7,064.24 3,856.81 456.30 47,000.53

JK Bank 1,162.10 5,633.61 4,835.58 803.25 60,269.22

Karur Vysya 445.30 4,772.75 3,270.37 501.72 37,634.90

2.2. AXIS BANK:

Axis Bank prides itself as a young and vibrant organisation and recognises its

employees as its greatest assets. Consequently, the employee satisfaction level in the

Bank is, possibly, amongst the highest in the industry, and does not stem from the

compensation package alone.

Comprising of people drawn from different specialisation and divergent

backgrounds, the employees merge into a highly homogeneous working group,

catalysed by the informal and transparent HRD policies pursued by the Bank. In

addition to an attractive compensation structure, we also offer leased housingfacilities, medical and health insurance and loan options.


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For achievers as well as those who love challenges offer opportunities in the following

fields:

General and Branch Banking

Specialised Financial Services (Treasury, Credit, Merchant Banking, etc.)

Retail and Institutional Marketing

Information Technology

2.2.1Products of Axis Bank

Axis bank offer different types of Products which provides good features and benefit to the

person. Different Products are,

(1) Account

(2) Deposit

(3) Loans

(4) Cards

(5) Forex

(6) Investment

(7) Insurance

(1)ACCOUNT :-

In the product of Account bank provides different variety of accounts like,

(A) Saving Account

(B) Current Account

(C) Salary Account

(A) Saving Account :- Saving Account also provides multi accounts for different

purpose like,

a. Easy Access Saving Account

b. Pension Saving Account

c. Prime Saving Account

d. Trust or NGO Saving Account


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(E) Trust or NGO Saving Account :-

Axis Bank's Trust Account is an effort to offer thoughtful banking for people who

spend their lives thinking of others. It is a complete banking solution for Trusts,

Associations, Societies, Government Bodies, Section 25 companies and NGOs, so

that the organisations can devote all of their time to their noble motivations.

(F) Womens Saving Account :-

Axis Bank's Women's Savings Account is an endeavor by the Bank to understand

the consumers' needs and redefine banking to suit customers requirements for a

truly comfortable banking experience. Women's Savings Account gives instant

access to customers money anywhere, anytime. With the Women's Savings

Account, customer can manage their money and life and Furthermore Axis Bank's

Women's Savings Account ensures that customer have enough time for all the

important things in life.

(G) Current Account : Current Account also provides multi accounts for different

purpose like,

a. AzaadiNo Frills Account

b. Resident Foreign Currency Account

(a) AzaadiNo Frills Account :-

Axis Bank's Azaadi Account, a savings account that doesn't require a minimum

balance. Experience a host of unparalleled features and heightened convenience with

Azaadi Account. Product Features are,

Zero Balance Savings Account

Instant Welcome Kit

International Debit Card

Phone Banking and Internet Banking

Free monthlye-statement
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(b) Residence Foreign Currency Account :-

A Resident Foreign Currency (Domestic) Account, with Axis Bank entitles to

maintain non-interest bearing current account in four major currencies : USD, EURO,

GBP and Japanese Yen. There will be no ceiling on the balances held in the account.

Cheque books denominated in USD or GBP or EURO or Yen will be issued on these

accounts with 25 leaves. The cheques thereby branded as RFC (Domestic) Account

will not be presented in clearing and will be payable only at the issuing branch. The

minimum balance for such a current account will be USD 100 or GBP 60 or EURO

100 or Yen 20,000. There will be a penal charge of USD 5 or GBP 3 or EURO 5 or

Japanese Yen 1,000 per quarter in case of failure to maintain the min balance

requirements. The RFC(D) account holders will not be allowed any ATM facility as

of now.

(H) Salary Account :- Salary Account also provides multi accounts for different

purpose like,

a) Wealth Salary Account :-

Axis Wealth Privileges Exclusive premium service through Banking

Privileges, Lifestyle privileges & Investment privileges, Access to

Premium Banking branches, Dedicated Wealth Manager for all banking

needs.

b) Defence Salary Account (Power Salute) :-

Axis Bank is proud to be the banking partner of the brave men and

women who defend our nation. Especially for them, Axis Bank has

created a salary account that understands their life in defence forces.

(2)DEPOSIT :- In the product of Deposit bank provides different variety of deposit like,

(A) Fixed Deposit

(B) Recurring Deposit

(C) Tax Saver Fixed Deposit

(D) Encash 24


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(3)LOANS :- In the product of Loan bank provides different variety of loans like,

(A) Home Loan

(B) Car Loan

(C) Education Loan

(D) Personal Loan

(E) Loan Against Property

(F) Loan Against Security

(G) Loan Against Shares

(4)CARDS :- In the product of Card bank provides different variety of card like,

(A) Credit Card

(B) Debit Card

(C) Prepaid Card

(5)FOREX:- The product of Forex includes,

(A) Travel Currency Card

(B) India Travel Card

(C) Foreign Currency Travellers Cheque

(D) Foreign Currency Cash

(6)INVESTMENT:- The Investment includes,

(A) Demat Account

(B) Mutual Fund

(C) Gold Mohurs

(D) Silver Mohurs

(E) Online Trading with Axis Direct

(F) 8% Saving Bonds


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(7)INSURANCE:- The Insurance includes,

(A) Life Insurance

(B) Health Insurance

(C) Home Insurance

(D) Travel Insurance

(E) Motor Insurance

2.3. HDFC Bank

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to

receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the

private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The

bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its

registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled

Commercial Bank in January 1995.

2.3.1. PROMOTERS

HDFC is India's premier housing finance company and enjoys an impeccable track record in

India as well as in international markets. Since its inception in 1977, the Corporation has

maintained a consistent and healthy growth in its operations to remain the market leader in

mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC

has developed significant expertise in retail mortgage loans to different market segments and

also has a large corporate client base for its housing related credit facilities. With its

experience in the financial markets, a strong market reputation, large shareholder base and

unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian

environment.

2.3.2 BUSINESS FOCUS :-

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound

customer franchises across distinct businesses so as to be the preferred provider of banking


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services for target retail and wholesale customer segments, and to achieve healthy growth in

profitability, consistent with the bank's risk appetite. The bank is committed to maintain the

highest level of ethical standards, professional integrity, corporate governance and regulatory

compliance. HDFC Bank's business philosophy is based on four core values - Operational

Excellence, Customer Focus, Product Leadership and People.

2.3.2. CAPITAL STRUCTURE :-

On 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The paid-up

capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity shares of Rs. 2/- each).

The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of the equity is held

by the ADS( American Depository Shares) and Global Depository Receipts (GDR). 30.68 %

of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,47,924

shareholders.

The shares are listed on the Bombay Stock Exchange Limited and The National Stock

Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the

New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global

Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No

US40415F2002.


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3.1. PERFORMANCE APPRAISAL

Performance Appraisal is the systematic evaluation of the performance of employees and tounderstand the abilities of a person for further growth and development. A performanceappraisal is a systematic and periodic process that assesses an individual employees job

performance and productivity in relation to certain pre-established criteria and organizationalobjectives.

Performance appraisal is generally done in systematic ways which are as follows:

1. The supervisors measure the pay of employees and compare it with targets and plans.

2. The supervisor analyses the factors behind work performances of employees.

3. The employers are in position to guide the employees for a better performance.

FIGURE 1: Components of Performance Appraisals

(Source: http://blog.deskera.com/2011/07/)


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3.1.1. Objectives of Performance Appraisal

Performance Appraisal can be done with following objectives in mind:

1. To maintain records in order to determine compensation packages, wage structure,

salaries raises, etc.

2. To identify the strengths and weaknesses of employees to place right men on right

job.

3. To maintain and assess the potential present in a person for further growth and

development.

4. To provide a feedback to employees regarding their performance and related status.

5. It serves as a basis for influencing working habits of the employees.6. To review and retain the promotional and other training programmes.

3.1.2. Advantages of Performance Appraisal

It is said that performance appraisal is an investment for the company which can be justified

by following advantages:

1. Promotion

Performance Appraisal helps the supervisors to chalk out the promotion programmes

for efficient employees. In this regards, inefficient workers can be dismissed or

demoted in case.

2. Compensation

Performance Appraisal helps in chalking out compensation packages for employees.

Merit rating is possible through performance appraisal. Performance Appraisal tries to

give worth to a performance. Compensation packages which include bonus, high

salary rates, extra benefits, allowances and pre-requisites are dependent on

performance appraisal. The criteria should be merit rather than seniority.

3. Employees Development

The systematic procedure of performance appraisal helps the supervisors to frametraining policies and programmes. It helps to analyse strengths and weaknesses of


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employees so that new jobs can be designed for efficient employees. It also helps in

framing future development programmes.

4. Selection Validation

Performance Appraisal helps the supervisors to understand the validity and

importance of the selection procedure. The supervisors come to know the validity and

thereby the strengths and weaknesses of selection procedure. Future changes in

selection methods can be made in this regard.

5. Communication

For an organization, effective communication between employees and employers is

very important. Through performance appraisal, communication can be sought for in

the following ways:

a. Through performance appraisal, the employers can understand and accept

skills of subordinates.

b. The subordinates can also understand and create a trust and confidence in

superiors.

c. It also helps in maintaining cordial and congenial labour management

relationship.

d. It develops the spirit of work and boosts the morale of employees.

All the above factors ensure effective communication.

6. Motivation

Performance appraisal serves as a motivation tool. Through evaluating performance

of employees, a persons efficiency can be determined if the targets are achieved. This

very well motivates a person for better job and helps him to improve his performance

in the future.


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3.1.3. Disadvantagesof Performance Appraisal

1. Time Consuming

It is recommended that a manager spend about an hour per employee writing

performance appraisals and depending on the number of people being evaluated, it

can take hours to write the departments PA but also hours meeting with staff to

review the PA.

2. Discouragement

If the process is not a pleasant experience, it has the potential to discourage staff. The

process needs to be one of encouragement, positive reinforcement and a celebration of

a years worth of accomplishments. It is critical that managers document not only

issues that need to be corrected, but also the positive things an employee does

throughout the course of a year, and both should be discussed during a PA.

3. Inconsistent Message

If a manager does not keep notes and accurate records of employee behavior, theymay not be successful in sending a consistent message to the employee. We all

struggle with memory with as busy as we all are so it is critical to document issues

(both positive and negative) when it is fresh in our minds so we have it to review with

the employee at performance appraisal time.

4. Biases

It is difficult to keep biases out of the PA process and it takes a very structured,

objective process and a mature manager to remain unbiased through the process.

Performance appraisal rater errors are common for managers who assess performance

so understanding natural biases is important to fair evaluations.
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3.1.4. Purposes of Performance Appraisal

FIGURE 2: Some Purposes of Appraisal

Organizational

Performance Improvement

Administrative

Individual

mers

Control

3.1.5. Performance appraisal methods

1. Critical incident method

This format of performance appraisal is a method which is involved identifying and

describing specific incidents where employees did something really well or that needs

improving during their performance period.

2.Weighted checklist method

In this style, performance appraisal is made under a method where the jobs being evaluated

based on descriptive statements about effective and ineffective behavior on jobs.

3.Paired comparison analysis

This form of performance appraisal is a good way to make full use of the methods of options.

There will be a list of relevant options. Each option is in comparison with the others in the
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list. The results will be calculated and then such option with highest score will be mostly

chosen.

4.Graphic rating scales

This format is considered the oldest and most popular method to assess the employees

performance.

In this style of performance appraisal, the management just simply does checks on the

performance levels of their staff.

5.Essay Evaluation method

In this style of performance appraisal, managers/ supervisors are required to figure out the

strong and weak points of staffs behaviors. Essay evaluation method is a non-quantitative

technique. It is often mixed with the method the graphic rating scale.

6.Behaviorally anchored rating scales

This formatted performance appraisal is based on making rates on behaviors or sets of

indicators to determine the effectiveness or ineffectiveness of working performance. The

form is a mix of the rating scale and critical incident techniques to assess performance of the

staff.

7.Performance ranking method

The performance appraisal of ranking is used to assess the working performance of

employees from the highest to lowest levels.

Managers will make comparisons of an employee with the others, instead of making

comparison of each employee with some certain standards.
http://www.humanresources.hrvinet.com/graphic-rating-scales/http://www.humanresources.hrvinet.com/essay-evaluation/http://www.humanresources.hrvinet.com/behaviorally-anchored-rating-scales-bars/http://www.humanresources.hrvinet.com/performance-ranking/http://www.humanresources.hrvinet.com/performance-ranking/http://www.humanresources.hrvinet.com/behaviorally-anchored-rating-scales-bars/http://www.humanresources.hrvinet.com/essay-evaluation/http://www.humanresources.hrvinet.com/graphic-rating-scales/


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8.Management By Objectives (MBO) method

MBO is a method of performance appraisal in which managers or employers set a list of

objectives and make assessments on their performance on a regular basis, and finally make

rewards based on the results achieved. This method mostly cares about the results achieved

(goals) but not to the way how employees can fulfill them.

9.360 degree performance appraisal

The style of 360 degree performance appraisal is a method that employees will give

confidential and anonymous assessments on their colleagues. This post also information that

can be used as references for such methods of performance assessments of 720, 540, 180

10.Forced ranking (forced distribution)

In this style of performance appraisal, employees are ranked in terms of forced allocations.

For instance, it is vital that the proportions be shared in the way that 10 or 20 % will be the

highest levels of performances, while 70 or 80% will be in the middle level and the rest will

be in the lowest one.

11.Behavioral Observation Scales

The method based on the scales of observation on behaviors is the one in which important

tasks that workers have performed during their working time will be assessed on a regular

basis.
http://www.humanresources.hrvinet.com/management-by-objectives-mbo/http://www.humanresources.hrvinet.com/360-degree-performance-appraisal/http://www.humanresources.hrvinet.com/forced-ranking-forced-distribution/http://www.humanresources.hrvinet.com/behavioral-observation-scales/http://www.humanresources.hrvinet.com/behavioral-observation-scales/http://www.humanresources.hrvinet.com/forced-ranking-forced-distribution/http://www.humanresources.hrvinet.com/360-degree-performance-appraisal/http://www.humanresources.hrvinet.com/management-by-objectives-mbo/


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3.1.6. Performance appraisal and Job Satisfaction

Performance appraisal politics are viewed as a vital human resource management issue where

it consists of two salient features: motivational motive and punishment motive. The ability of

appraisers (e.g., immediate bosses/managers) to properly implement such appraisal politics in

allocating performance ratings may have significant impact on job satisfaction. Although the

nature of this relationship is important, little is known about the role of performance appraisal

politics as a predicting variable in the performance appraisal models.

Figure 3: Relationship between Performance Appraisal Politics and Job Satisfaction

and Commitment

Independent Variable Dependent Variable

Based on the framework, it seems reasonable to assume that the ability of appraisers to

properly implement motivational and punishment motives in performance appraisal systems

may increase employees job satisfaction.

3.1.7. Job Commitment

Organizational commitment is the relative strength of the individuals identification with, and

involvement in, a particular organization. It consists of three factors as highlighted by

Armstrong (2006):

i. a strong desire to remain a member of the organization;

ii. a strong belief in, and acceptance of, the values and goals of the organization; and

iii. a readiness to exert considerable effort on behalf of the organization.

Performance Appraisal:

Motivational Motive

Punishment Motive

Job

SatisfactionCommitment


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An alternative definition of organizational commitment emphasizes the importance of

emotions, costs and personal values in creating commitment. Meyer and Allen identified

three components of organizational commitment as follows:

i. Affective Commitment (emotional attachments)

ii. Continuance Commitment (the costs of leaving, such as losing attractive benefits or

seniority)

iii. Normative Commitment (individual personal values)

Affective commitmentis concerned with employees attachment to, identification with and

involvement in the organization. It therefore, follows that; affective commitment to the

organization could be characterized by a sharing the values, a desire to maintain membership

and working without any expectations for the benefit of the organization. In consequence of

the affective commitment, employees want to maintain their memberships in the

organization. Affective commitment refers to feelings of belonging and sense of attachment

to the organization and it has been related to personal characteristics, organizational

structures, and work experiences, for example; pay, supervision, role clarity and skill variety

Continuance commitmenton the other hand refers to employees assessment of whether the

costs of leaving the organization are greater than the costs of staying. Employees who

perceive that the costs of leaving the organization are greater than the costs of staying remain

because they need to. In other words, individuals do not leave a company for fear of losing

their benefits, taking a pay cut, and not being able to find another job.

Normative commitment refers to an employees feelings of obligation to remain with the

organization. The individual commits to and remains with an organization because of feelings

of obligation. These feelings may be derived from many sources. For example, the

organization may have invested resources in training an employee who then feels a moral

obligation to put forth effort on the job and stay with the organization to repay the debt. It

may also reflect an internalized norm, developed before the person joins the organization

through family or other socialization processes, that one should be loyal to ones

organization.


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3.2. LITERATURE REVIEW

Jiing-Lih Farh, James D. Werbel, Arthur G. Bedeian, (1988). This study

investigated the effectiveness of a self-appraisal-based performance evaluation system

(SABPE) that incorporates self-assessment into traditional supervisory evaluation

procedures. The sample size taken for the research was 88 faculty members and their

chairpersons of Lxjuisiana State University. Results indicated that (1) there was high

congruency between self- and chairperson ratings, (2) both ratings had moderate to

high levels of criterion-related validity, and (3) both faculty members and

chairpersons reported high SABPE acceptance.

Douglas kruse, joseph blasi, (1995). The research talked about the employee

ownership and firm performance. The research was conducted in U.S. attitudinal and

behavioral studies tend to find higher employee commitments among employee-

owner but mixed results on motivation, satisfaction and other measures.

Kulno Trk, (2001). The research paper talked about the wage policy in private

educational institutes. The aim of the present paper was to discuss the wage policy in

Estonian higher educational establishments and the analysis was based on current

theories of performance management and work compensation. A survey of salaries of

the academic staff in Estonian higher educational institutions. But this research paper

did not focus on individual performance or satisfaction.

Deanna Geddes and Alison Konrad (2002)studied the demographic differences and

perceptions of performance appraisal practices between the employees and their

managers. 197 employees of an organization who represent over 120 nationalities

were surveyed. The authors used status characteristics theory, social identity theory,

and relational demography perspectives to develop hypotheses regarding employees

reactions to feedback in a multicultural organization. The objective of this paper was

to study the demographic differences between an employee and his appraiser and its

impact on how the employee view and respond to the performance appraisal.


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Deanne N. den Hartog, Paul Boselie & Jaap Paauwe (July 2004).The research had

focused on multi-level elements, and adds to previous models by explicitly

incorporating employee perceptions, the role of direct supervisors and possible

reversed causality. Most Performance Management practices (e.g. performance

appraisal, feedback training, coaching, information sharing) were facilitated and

implemented by direct supervisors or front-line managers. Therefore the behavior of

line-managers will mediate the effect of (most) practices on employee perception (and

behavior). The research was more focused on the supervision aspects. This paper

presented a model for Performance Management combining insights from strategic

HRM and I/O psychology.

Smita Chattopadhyay, Amit Gupta, (2005).The research suggested that people go

through life stages and career stages that affect their job attitudes, work perceptions

and performance. It talked that it has often been seen that employees who occupy

similar positions in an organizations may have completely different interests, goals

and job expectations. Research in sociology, clinical psychology and vocational

psychology suggests that people go through life stages and career stages that affect

their job attitudes, work perceptions and performance. The focus was more toward the

employee career and the job of interest and was not on the satisfaction of

effectiveness.

Sanjeet Singh, Gagan Deep Sharma, Harmandeep Kaur (2005) studied the effect

of the performance appraisal on an individual as well as on the organizations. A

sample size of 100 employees was chosen from North India for survey.

Questionnaires were used to collect the data from samples. Various statistical tools

like descriptive statistics, Regression, Correlation, Residual analysis and Chi square

test were used for analysis. The objective of the study was to evaluate the

performance appraisal techniques used by various organizations. The findings of the

survey revealed that there is a great impact of performance appraisal system on both

the employee as well as the organizations performance. The authors concluded that

performance appraisal system is advantageous to both in many ways.


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Mary A. Malina, Hanne S. O. Nrreklit & Frank H. Selto (2006)studied the cause

and effect of performance measurement models like balanced score card. The study

reports an analysis of linked performance measures for 31 quarters (1997 2005) and

31 business units. From the study it was found out that the employers were satisfied

with the PMM model even though there was no statistical significance or significant

predictive ability in the model. The perception of managers regarding (a) the relations

in the scorecard and (b) the climate of control intended and achieved in the

organization through the scorecard was also studied. The authors concluded that

effective management control does not require statistically significant cause-and-

effect relations in a PMM. PMM can create an effective climate of control.

Christian Grund, Dirk sliwka (2007). The research is done in German firms. The

research paper talks about individual employees; they test these hypotheses and also

explore the impact of PA on performance pay and further career prospects. The

research showed that PA is positively linked to an individual's willingness to take

risks. A non-monotonic relation between the hierarchical level and usage of

performance appraisal: The performance of employees with very high or very low

responsibilities is assessed less often.

Todd Grub (2007)studied the negative aspects of performance appraisal. The study

was carried out on the basis of previous studies and various research papers. The main

objective of the study was to understand the reasons for the failure of performance

appraisal and performance pay in enhancing organization performance. Various

methods and suggestions were also provided by the author to improve employee and

organization productivity instead of performance appraisal. From the study it wasfound out that conducting performance appraisal is very expensive and not useful for

the company. Performance appraisal leads to conflicts in the organization and is

disliked by both employees as well as employers. Findings of the study revealed that

performance appraisal reduces employee productivity, satisfaction and engagement.

Nathalie Abi Saleh Dargham (2008) conducted an exploratory study on effective

management of the performance appraisal process in Lebanon. Personal in-depth


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interviews were conducted with HR managers of Lebanese firms to collect the data.

Sample for this study was taken from the following industries: Banks, Insurance

Companies, Hotel, Construction, Restaurant, Consultancy, Commercial, Hospital,

Printing firm and Industrial. The objective of this study was to examine the

performance appraisal system in Lebanese firms. The purposes and problems of the

performance appraisal system were also studied. From the survey it was found out

that the most common types of the performance appraisal employed in the Lebanese

firms are the Graphic Rating Scale and the Management by Objectives. The

performance appraisal system is mainly used by the HR managers for salary

administration, promotions and recognition. The authors concluded that there were

various areas of improvement in the appraisal system like use of a clear evaluation

criteria, an open and sincere feedback, a greater senior management support, a process

perceived as being fair by employees and a structure in which improvements in

performance appraisals may be facilitated.

Lori Criss Powers (2009) studied the framework for evaluating the effectiveness of

performance measurement systems. The study is based on a literature review of over

150 peerreviewed articles and books related to performance measurement systems.

The objective of the study was to propose an evaluation method and framework using

an evidenceinformed theory of change. It was found out from the study that if the key

elements of performance measurement system are in place and the inputs and outputs

are appropriate and short term outcomes are achieved then performance measurement

system is effective. The author concluded that evaluation is the key activity associated

with performance measurement systems.

Evelina W. Cross, Amelia Estepa Asperin, Mary Frances Nettles (2009) studied

the Competency-Based Performance Appraisals to improve the Performance

Evaluations of School Nutrition Managers and Assistants/Technicians. A two-phased

process was used to develop the competency-based performance appraisal resource

for SN managers and assistants/technicians. The main objective of the study was to

develop a competency-based performance appraisal resource for evaluating school


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nutrition (SN) managers and assistants/technicians. It was found out that effective

performance appraisal forms should have (1) criteria clearly defining expected

performance, (2) a rating scale appropriately reflecting criteria, (3) clear instructions,

(4) a user-friendly format, (5) space for comments, and (6) a plan for improvement.

The authors concluded that the competency-based performance appraisal resource

provides a universal platform for evaluation relevant to SN programs of all types and

sizes across the nation. The performance appraisal resource may be used as a general

reference, as well as for individual learning, employee training, and as a component of

departmental orientation.

Maurizio Pugno, Sara Depedri (2009). The research talked about the relationship of

job performance, job satisfaction, motivation and economic incentives. The research

has provided the key idea behind this framework was that intrinsic motivations and

self-esteem help explain both job satisfaction and j

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