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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
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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.
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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.
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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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