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Caiib Abm Full

This document provides an overview of business cycles and the key phases: 1. Business cycles are the ups and downs in economic activity over time, consisting of periods of prosperity (boom) and depression. The phases tend to occur simultaneously across different industries. 2. The phases of a business cycle are: boom, recession (crisis), depression, and recovery. During a boom, production and profits are high. A recession begins as demand declines, leading to falling output and rising unemployment during a depression. Recovery begins as prices drop and spending increases again. 3. Business cycles are characterized by synchronous movements across industries, alternating phases of prosperity and depression, recurring over time in a wave-like pattern. The

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280 views909 pages

Caiib Abm Full

This document provides an overview of business cycles and the key phases: 1. Business cycles are the ups and downs in economic activity over time, consisting of periods of prosperity (boom) and depression. The phases tend to occur simultaneously across different industries. 2. The phases of a business cycle are: boom, recession (crisis), depression, and recovery. During a boom, production and profits are high. A recession begins as demand declines, leading to falling output and rising unemployment during a depression. Recovery begins as prices drop and spending increases again. 3. Business cycles are characterized by synchronous movements across industries, alternating phases of prosperity and depression, recurring over time in a wave-like pattern. The

Uploaded by

naani14029
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 909

er-5:Bus

Chapt i
nessCy
cles

Busi
nessCy
cle=>
*
Iti
sal
socal
l
edEconomi
cCy
cle
*
Iti
snotr
egul
ar
*
Iti
snotpr
edi
ctabl
e
*
Iti
snotr
epet
it
ive
*BusinessCyclesi
mplymeanst hewhole
courseofbusinessact
ivi
tywhichpasses
thr
ought hephaseofprosper
it
yanddepressi
on.

Char
act
eri
sti
csofBusi
nessCy
cle:
1-Busi
nessCy
clei
sSy
nchr
oni
c:=>
*Theupwardanddownwar
dmovementtendto
occuratt
heal
mostsameperi
odi
nal
lindust
ry.
*Thewaveofprosper
it
y&depressi
oni
none
i
ndust
rywil
lsoongenerat
ethesamewavei
n
ot
heri
ndustr
ies.
2-Abusi
nesscy
cleshowsawev
eli
ke
mov
ement:
=>
*Theperi
odofpr
osper
it
yanddepr
essi
oncan
beal
ter
nati
vel
yseeni
nacycl
e.

Pr
osper
it
y Depr
essi
on

3-Cycli
cfl
uct
uat
ionsar
erecur
ri
ngi
n
natur
e:=>
*
Thevari
ousphasesarer
epeated.Aboom i
s
f
oll
owedbydepressi
on& adepressi
onis
f
oll
owedbyaboom.
BOOM Depr
essi
on

Joi
n"CAI
IBWI
THASHOK"ony
out
ube
4-Ther
eisnoindef
ini
tedepr
essi
onoret
ernal
boom per
iod.
5-Theup&downmov ementarenot
symmetr
ical.Thedownwardmovementismore
sudden&violentt
hantheupwar
dmov ement
.

PhasesofBusi
nessCy
cle:
1-Boom
2-Recessi
on
3-
Depr
essi
on
4-Recov
ery

Joi
n"CAI
IBWI
THASHOK"ony
out
ube
1-Boom:(
Prosper
it
y)
*Duri
ngt hi
sphasetheproduct
ioncapaci
tyi
s
ful
lut
il
ized&productsaresol
dabovenormal
pri
cetogivehi
gherprofi
t.
*
Itat
tract
smor
einv
est
orsduet
opr
ofi
t.
*
Fact
orypr
oducemor
eandmor
epr
oduct
s.
*
Empl
oyeeswor
kathi
gherwager
ate.
*
Thepr
iceofpr
oductkeepr
isi
ng
*NowSal ar
ycalssorf
ixedincomegroupfi
ndit
diff
icul
ttocopewit
hincreasi
ngpri
cebecause
theiri
ncomedonotincreasethatr
api
d
*Nowthedemandstartdecr
easi
ngand
consumpt
ioni
salsoreduced.
*
Thusboom orpr
osper
it
yreachesi
tspeak

Joi
n"CAI
IBWI
THASHOK"ony
out
ube
2-Recessi
on:
(Cr
isi
s)
*OnceEconomyr eachesthepeakthecour
se
changes.Adownwar dtendencyi
ndemandi s
observedbutpr
oducerwhoar enotawareofit
tendtogoonproducing.
*Suppl
ynowexceeddemandandst
ockget
pil
i
ngup.
*Nowpr oducerr
educetheproduct
ion&st
op
anyfuturepl
anoffurt
herinv
estmentor
expansion.
*
Worker
sar
efi
redandbankskeepaski
ngf
or
r
epay
mentofl
oani
nstal
l
ment.
*
Unempl
oymentl
eadst
ofal
li
nincome,
expendi
tur
e,pr
ice,
prof
itandt
radeact
ivi
ti
es.
*
Cust
omer
sinhopeofmor
efal
li
npr
icest
ops
ormi
nimi
zet
hepur
chaseofpr
oduct
s.
*Thi
sphaseisknowasCRISI
S&i
tisut
most
suff
eri
ngforabusi
ness.
3-Depr
essi
on:
*Unemploymentofbot
hmenandmat
eri
ali
sa
charact
eri
sti
cofthi
sphase.
*Nowduet olowdemandt heproducerar
e
compel
ledtosell
theirpr
oductsatpri
cewhich
i
slowerthaneventheiri
nvest
mentcost.
*Product
ioni
sevenal
moststoppedasa
consequencet
hemoreworkersaret
hrownout
.
*Thedemandforbankcredi
tisati
tsl
owest
whichresul
tsi
nidl
efunds.

*Manyfi
rm whi
chcannotpayt
hei
rdebtgoes
bankr
upt
.
*
Overal
ltheeconomi
cact
ivi
tyi
sati
tsbot
tom.

Joi
n"CAI
IBWI
THASHOK"ony
out
ube
4-Recov
ery
:
*Thepri
ceskeepfall
ingnowtheconsumerwho
havest
oppedtheirconsumpt
ionbowstartt
o
buyorconsuming.
*
Banksnowstar
tgivi
ngl
oanatlessi
ntr
est
r
atesandi
neasyter
mstoearnsomeprofi
t.
*Nowagaindemandi ncr
easesandt hest
ocks
arei
nsuf
fi
cienttoful
fi
llt
hemar ketr
equir
ement
sothepr
oductionagainstar
t.
*Labour
sar
ereadyt
owor
kinl
owwagest
o
earn.
*Thewaveofrecoveryst
artandsooni
tgi
ve
boostt
oeconomi cacti
vi
ty.
*
Thusthedepr
essi
onphasegi
vewayt
o
r
ecov
ery.
Joi
n"CAI
IBWI
THASHOK"ony
out
ube
Chapt
er8:Monet
aryPol
icyandFi
scal
Poli
cy
Whatwewi
llst
udy:
Whati
sMonet
aryPol
icy?
Whatar
eMonet
aryPol
icyt
ool
s?
AboutCRR,
SLR,
BANKRATE,
REPORATE

Monet
aryPol
i
cy:
*Monet
aryPoli
cyi
satoolusi
ngwhicht
heGov
andCentr
alBank(
RBI
)ofacountr
ycontrol
s
thef
oll
owing:
1-
TheSuppl
yofmoney

2-
Avai
labi
li
tyofmoney
3-
Costofmoneyorr
ateofi
nter
est
*I
nordertoattai
ntheofobj
ect
iveofgr
owt
h&
sust
ainabi
li
tyofeconomy.
Ty
peofMonet
aryPol
icy:
(2)
1-Expansi
onar
y2-
Cont
ract
ionar
y

Expansi
onar
yPol
icy:
*I
tincr
easest
hesuppl
yofmoneyi
nthe
economy.
*I
tist
radi
t i
onal
lyusedt ocombat
unemploy
menti nar ecessi
onper
iodby
l
oweri
ngt heint
erestrates.

Cont
ract
ionar
yPol
icy:
*
Itdecr
easest
het
otalmoneysuppl
y.
*I
tinv
olv
esr ai
singt
hei
nter
estr
atesi
nor
dert
o
combatinf
lati
on.

Tool
sforMonet
aryPol
icy
:
1-
BankRat
e2-
CRR 3-
SLR 4-
RepoRat
e
5-
Rev
erseRepoRat
e6-
OMO
1-
BANKRATE:
*Ther
ateatwhichRBIre-di
scount
sbil
lsof
commerci
albanksiscall
edbankrate.
*
Iti
sal
socal
leddi
scountr
ate.
*
Changesi
nBRisdonebyCent r
alBank(RBI)
t
ocontr
olt
hemoneysupplybutit
srolli
svery
l
imi
tedi
nIndi
abecauseoffol
lowi
ngfactor
s:
1-Thest
ructur
eofint
restrat
eis
admini
str
atoredbyRBI-theyar
enot
automat
ical
lyli
nkedt
oBR.
2-Thebi
llmar
keti
nIndi
aisunderdev
eloped
anditi
snotdir
ect
lyi
nfl
uencedbyBR.

OPENMARKETOPERATI
ON(
OMO)
*undert
hisRBIbuysandsel
lsGovsecur
it
iesor
bondsinsecondar
ymarket.
*
WhenGovbondsel
l=>t
oabsor
bthel
iqui
dit
y
*
WhenGovbondsbuy=>t
oinj
ectt
hel
iqui
dit
y.
CASHRESERVERATI
O(CRR)

*Thepresentbankingsy st
em iscal
led
FRACTIONALRESERVEBANKI NGSYSTEM as
banksarerequiredt okeeponl yafr
acti
onof
thei
rdepositl
iabil
ityinthef or
m ofl
iquidcash
withthecentr
albankf orensuri
ngsafetyand
l
iquidi
tyofdeposits.
*
NowCRRist
hisl
iqui
dcasht
hatbankshav
e
t
omai
ntai
nwi
thRBIasacert
ainper
cent
age(%)
oft
hei
rNDTL(
netdemand&t
imel
iabi
li
ty)
.
*
Iti
saspersect
ion42(
1)ofRBIACT.
*
Limi
tasperAct
:Mi
n:No.
,Max:No
*
Incr
easi
ngt
heCRRr
educet
hel
iqui
dit
y.
*
Decr
easi
ngt
heCRRwi
lli
ncr
easet
hel
iqui
dit
y.
*
Keptascashwi
thRBI
.
*
RBIdoesnotpayanyi
ntr
estonCRR.
STATUTORYLI
QUI
DITYRATI
O:
*
Theper
cent
age(%)ofNDTLt
hatbanksneed
t
omaint
aini
nthefor
m of
1-
Cashwi
thbank
2-
cashwi
thot
herbank
3-
excesscashwi
thRBI
4-
Inv
est
menti
nGovsecur
it
ies
5-
Gol
d
i
scal
ledSLR.
*I
tisaspersect
ion24ofBanki
ngRegul
ati
on
act
.
*
Limi
tasperACT:Mi
n:no,
Max:40%ofNDTL
*
Mai
nobj
ect
iveofSLR:
SLRismaintai
nedi
nor dertocontrolt
he
expansi
onofbankcreditbyincr
easingSLRthe
bankcredi
twil
lgodownanddecr easi
ngthe
SLRthebankcredi
twillgoup.
RepoRat
e:(
Repur
chaseRat
e)
*Thesal
eofsecuri
ti
esbybankst
oRBIwi
tha
promi
setorepur
chaseaft
ersometi
me
Or
*RepoRateist
herateatwhi
cht
heRBIl
ends
shortt
erm moneyt
obanks.
*I
fRepor at
eincreasesthenitbecome
expensi
veforbankst oborr
owmoneyf r
om RBI
andbankalsolendittocustomer sathi
ghr
ate.
*I
fReporat
eisdecr
easedt henbankget
moneyoncheaprat
eandl enditt
ocustomers
al
soatcheaprat
e.Sothebank'slendi
ngrat
e
i
sdeter
minedbyReporate.

Par
t-I
I
REVERSEREPORATE,
OMO,FiscalPol
icy
,
FRBM ACT,
MCQ.(Wewil
lSt
udythesetopics)
Joi
nCAI
IBWI
THASHOKonYouTube
ABM-MODULEA
Chapt
er10:Uni
onBudget
(Par
t-
II
)
Whatwewi
llst
udy:
*Whati
suni
onbudgetandi
t'
scomponent
s
*
BudgetExpendi
tur
e?

Budgetcomponent
s:
C1-
BudgetReci
pt(
lect
ure1)
C2-
BudgetExpendi
tur
e

C2-BudgetExpendi
tur
e:
1-
Rev
enueExpendi
tur
e
2-
Capi
talExpendi
tur
e
Recei
pt(
Income) Expendi
tur
e
Rev
enue Nol
iabi
li
ty NoAsset
Nor
educeAsset Nor
educel
iabi
li
ty
Capi
tal Li
abi
li
ty Asset
ReduceAsset Li
abi
li
tyr
educe

Rev
enue:Nochange
Capi
tal:Change(
li
abi
li
ty,
asset
)

Capit
alRecei
pt:(
income):Iwi
llear
neit
her
bytaki
ngloanorbysell
ingmyassets.
Taki
ngl
oan(
bor
rowi
ng):l
iabi
li
tyi
ncr
ease
Sel
li
ngasset:Assetr
educe
Example:Yout
ake10000Rsl
oanf
rom
yourf
ri
end.
Exampl
e:Yousol
dyourf
ri
dge
Capit
alexpendit
ure:Iwi
llspendmoney
ei
thertoreducemyloanort ocr
eat
enew
asset
.
ReducemyLoan:Li
abi
li
tyr
educe
Cr
eat
easset
s:Asseti
ncr
ease
Exampl
e:Iretur
nRs5000tomyf
ri
end
fr
om whom Ihavet
akenl
oan.
Exampl
e:Ihav
espendRs50000t
obuy
newAC.
a)Rev
enueexpendi
tur
e:

Revenue:Whichnei
thercr
eat
eanyasset
snor
r
educetheli
abil
it
y
*
Iti
sregul
arandr
eoccur
ri
ngki
ndofExpendi
tur
e
1-I
nst
restpay
ment
2-
Subsi
dy
3-
Pensi
on
4-
Pol
i
ce
5-
Grantt
ofor
eignGov
ernment
6-
Grantt
oSt
ate
7-
Soci
alser
vice
8-
Assi
stancet
oStatef
rom NCCF(
Nat
ional
Cal
amit
yConti
ngencyFund)
9-
Def
ence
10-
Other
b)capi
talexpendi
tur
e

Capi
tal:
Whi
chei
thercr
eat
eaasset
sorr
educest
he
l
iabi
li
ty.
1-
Def
ence
2-
Loant
oPubl
icEnt
erpr
ise
3-
Loant
ofor
eignGov
ernment
4-
Other

TotalExpendi
tur
e=Rev
enueExpendi
tur
e+Capi
tal
expendit
ure.(
f5)

a)Pl
annedexpendi
tur
e
b)NonPl
annedexpendi
tur
e

a)Dev
elopment
alexpendi
tur
e
b)NonDev
elopment
alexpendi
tur
e
I
dent
if
ythecomponentofbudget
:(
exer
cise)
1-
Post
aldef
ici
t
2-
Rai
lwayexpendi
tur
e
3-
Sal
ary
4-
Ser
vicet
ax
5-
Ext
ernalgr
antt
oNepal
6-
Ext
ernalAssi
stance(
WBoranycount
ry)
7-
Def
enceSal
ary
,pensi
on
8-Economicser
vices(
Agr
icul
tur
e,I
ndust
ry,
power
,
t
ransport
)
9-
Admi
nist
rat
iveser
vices
10-Gov
ernmentHospi
tal
s
11-
Soci
alser
vice
12-Subsi
dy
13-
Loant
oSt
ate

Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
ABM-MODULEA
Chapt
er10:Uni
onBudget
(Par
t-
II
I)
Whatwewi
llst
udy:
*
Typesofbudget
*Whati
sdef
ici
t?
*
Whati
srev
enuedef
ici
t?
*
Whati
sFi
scaldef
ici
t?
*
Whati
sPr
imar
ydef
ici
t?

1-
Budgett
ype:
Sur
plusbudget:Recei
pt>Expendi
tur
e
Def
ici
tbudget:Recei
pt<Expendi
tur
e
Bal
ancebudget:Recei
pt=Expendi
tur
e

Joi
nCAI
IBWI
THASHOKonYouTube
2-
Rev
enuedef
ici
t:
Revenuedef
ici
t=Rev
enueExpendi
tur
e-Rev
enue
Receipt
Ef
fectofRev
enueDef
ici
t:
1-Gover
nmenti
snotabov
etomanagei
tregul
ar
Expendi
tur
e.
2-Ast herev
enuedefici
tincr
easesthemor ecapit
al
receipti
sneededtomanaget heExpenditur
e.(once
revenueReceipti
sexhaustedthengovernment
needt omeetit'
sExpendit
urefr
om capit
alreci
ept)
3-
Ifcapit
alrecei
ptisrai
sedbybor
rowingt
hen
i
ntrestbur
denwi l
lincr
easeongover
nment.
Exampl
e:Cal
cul
ateRev
enueDef
ici
t
Rev
enuer
eci
ept=1800Cr
,
Capi
talExpendi
tur
e=1100Cr
Bor
rowi
ng=400Cr
,Recov
eryofLoan=100Cr
,
Rev
enueExpendi
tur
e=2000Cr
Rev
enuedef
ici
t=2000-1800=200Cr
3-
Fiscaldef
ici
t:
Fiscaldefi
cit=Tot
alExpendi
tur
e-Tot
alr
ecei
pt
(excludi
ngbor r
owing)
*Not
e:Theborr
owi
ngisnotpartofcapi
talr
ecei
pt
whencal
cul
ati
ngFi
scaldef
ici
t.
TotalExpendi
tur
e=Rev
enueExpendi
tur
e+Capi
tal
expendit
ure
TotalRecei
pt=Rev
enuer
ecei
pt+capi
talr
ecei
pt
(excl
udingbor
rowi
ng)
Exampl
e:Cal
cul
ateFi
scalDef
ici
t
Rev
enuer
eci
ept=1800Cr
Di
sinv
est
ment=800Cr
Capi
talExpendi
tur
e=1100Cr
Bor
rowi
ng=400Cr
Recov
eryofLoan=100Cr
Rev
enueExpendi
tur
e=2000Cr
Capi
talr
ecei
pti
ncl
udes:
Di
sinv
est
ment
,recov
eryofl
oan,
Bor
rowi
ng
Tot
alExpendi
tur
e=REx+CEx=2000+1100=3100
Tot
alr
ecei
pt=RRcpt+CRcpt
=1800+(
800+100)=2700
NowFi
scaldef
ici
t=3100-
2700=400Cr
HowGov
ernmentdeci
dehowmucht
obor
row:
Needt
otal=3100Cr
Fi
ndr
evenuer
ecei
pt=1800Cr
Remai
ning=1300Cr
Donedi
sinv
est
ment=800Cr
Remai
ning=500Cr
Fi
ndr
ecov
erofl
oan=100Cr
Remai
ning=400Cr
Nowgovernmentwil
lbor
rowonl
y400CrRst
o
meeti
tsexpenses.
Sowecansay:
Fi
scaldef
ici
t=Bor
rowi
ng
Ef
fect:I
nfl
ati
oni
ncr
eases,
fut
uregr
owt
hdecr
ease
Pr
imar
yDef
ici
t:

Pr
imar
yDef
ici
t=Fi
scalDef
ici
t(Cur
rentYear
)-
(
minus)I
nst
restpai
donpr
evi
ousbor
rowi
ng.

Exampl
e:Cal
cul
atePr
imar
yDef
ici
t
Rev
enuer
eci
ept=1800Cr
Di
sinv
est
ment=800Cr
I
nter
estpai
d(pr
evi
ousy
earbor
rowi
ng)=150Cr
Capi
talExpendi
tur
e=1100Cr
Bor
rowi
ng=400Cr
Recov
eryofLoan=100Cr
Rev
enueExpendi
tur
e=2000Cr
Pr
imar
yDef
ici
t=400-150=250Cr

Joi
nCAI
IBWI
THASHOKonYouTube
Exerci
sefory
ou1:(
PDFav
ail
abl
eint
elegr
am
channel)

Rev
enueExpendi
tur
e=5000Cr
Di
sinv
est
ment=1800Cr
Capi
talExpendi
tur
e=6100Cr
Recov
eryofLoan=2500Cr
Rev
enueRecei
pt=2000Cr
I
nter
estpai
d(pr
evi
ousy
earbor
rowi
ng)=2000Cr

Q1:Cal
cul
atePr
imar
yDef
ici
t.
Q2:Cal
cul
ateRev
enueDef
ici
t
Q3:Cal
cul
atef
iscalDef
ici
t
Q4:
Cany
oucal
cul
atet
hegov
ernmentbor
rowi
ng?

A1:2800CrA2:3000CrA3:
4800CrA4:
4800Cr

Joi
nCAI
IBWI
THASHOKonYouTube
Exer
cisef
ory
ou2:

Rev
enueExpendi
tur
e=20000Cr
I
nter
estpai
d(pr
evi
ousy
earbor
rowi
ng)=1000Cr
Bor
rowi
ng=3200Cr
Di
sinv
est
ment=11800Cr
Recov
eryofLoan=12500Cr
I
nter
estpai
d(pr
evi
ousy
earbor
rowi
ng)=2000Cr

Q5:Cal
cul
atePr
imar
yDef
ici
t.
Q6:Cal
cul
atef
iscalDef
ici
t

A5:1200Cr
,A6:3200Cr

Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er12:Ti
meVal
ueofMoney
Whatwewi
llst
udy:
*
Whati
sRul
eof72?
*
Howt
oCal
cul
ateef
fect
iveROI
?
*
Howt
oCal
cul
ateNetPr
esentVal
ue?
*
Whati
sDi
scount
ingandCompoundi
ng?
*
Howt
oCal
cul
atePr
esentVal
ueofMoney
?
*
Howt
oCal
cul
ateFut
ureVal
ueofmoney
?
*
Whati
sAnnui
ty?
*
Whati
sOr
dinar
yAnnui
ty?
*
Whati
sAnnui
tyDue?
*Manyexampl
es&MacMi
ll
anbook'
sunsol
ved
quest
ions.
*
Pract
iceQuest
ions.

Subscr
ibeCAI
IBWI
THASHOKonYouTube
TheRul
eof72:

TheRul
eof72ansewert
hef
oll
owi
ngquest
ion:
"
Howqui
ckl
ythi
samountwi
lldoubl
einv
alue"
Soi
frat
eofi
nter
esti
srt
henmoneywi
llbedoubl
e
i
n:

Exampl
e1:i
fr=12%sot
het
imewi
llbe

Soitwil
ltake6year
sforanamountsay10000t
o
gr
owt o20000ifROIis12%.

Joi
nCAI
IBWI
THASHOKonYouTube
Exampl
e2:i
fr=8%sot
het
imewi
llbe

Soitwil
ltake9year
sforanamountsay500t
o
gr
owt o1000ifROIis8%.

Exampl
e3:
Howmucht
imewi
lli
ttakeRs1Lact
o
become4Laci
frat
eofi
nter
esti
s18%PA.
Sol:Firstfi
ndhowmuchtimewi
llt
aket
odoubl
e
thenjustthedoubl
ethet
ime.
Ti
met
akent
odoubl
etheamount
:

So4yeari
twil
ltaket
ogett
heamountdoubl
e(f
rom
1Lacto2Lac)
Nowdoubl
ethe4y
ear
sso8y
ear
s.
I
twi
llt
ake8y
ear
stof
or1Lact
obecome4Lac.

TABLE:

ROI Yeart
o Yeart
o
doubl
e f
ourti
mes
6% 12 24
8% 9 18
12% 6 12
18% 4 8

Joi
nCAI
IBWI
THASHOKonYouTube
Quest
ionsf
rom Macmi
ll
anbook:
(seey
ourbook)
Quest
ionNo9:Howlongitwil
ltakeforRs500t
o
gr
owtoRs2000atf
oll
owinginterestr
ate:
a)4%
b)10%
c)12%
Sol
uti
on:
A)t
imewi
llbe 72/
4=18Year
s
B)t
imewi
llbe72/
10=7.
2year
s
C)t
imewi
llbe72/
12=6y
ear
s

Questi
onNo:17(h):Undert
heruleof72,howlong
wil
litt
akeforaninvest
menttoquadrupl
einval
ue,
i
ftheinter
estr
ateis12%?
Solut
ion:Ti
metakeninbecomi
ngamountdoubl
e
wi
llbe72/12=6year
s
*Nowtimetakei
nbecomi
ngamoutquadr
upl
e=
6*2=12year
s.
EXERCI
SE(
Plzsol
vei
t)
1)Howmuchti
mewi lli
ttakef
orRs1000t
o
become2000i
fint
erestrat
eis
a)9%
b)6%
c)24%
d)18%
1)Howmucht i
mewi l
litt
akeforRs20000t
o
become80000ifi
nter
estrat
eis
a)9%
b)6%
c)24%
d)18%
Gi
veYouransweri
ncommentsect
ion.

Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er12:Ti
meVal
ueofMoney(
Par
t-
II
)

Whatwewi
llst
udy:
*
Howt
oCal
cul
ateef
fect
iveRat
eofi
nter
est?
*Someexampl
es&MacMi
ll
anbook'
sunsol
ved
quest
ions.
*
Pract
iceQuest
ions.

Ef
fect
iveRat
eOfI
nter
est
:

ToCal
cul
ateEf
fect
iveROIwewi
llusef
ormul
a:

ERI=
Ef
fect
iveRat
eofI
ntr
est=(
1+r
/n)
^n-1
Rat
eofi
nter
estcancompounded:
1-
Year
ly
2-
Hal
fyear
ly
3-
Quar
ter
ly
4-
Mont
hly
5-
Dai
l
y
Fr
equency ROI New r
= Ti
me New
PA ROI ROI
/100 Year t
ime(
n)

Year
ly 12% 12% .12 1y
ear 1
Hal
f 12% 6% .06 1y
ear 2
Year
ly
Quar
ter
ly 12% 3% .03 1y
ear 4
Mont
hly 12% 1% .01 1y
ear 12
Dai
ly 12% 12/
365 1y
ear 365
Example1:Whatwi l
lbeeff
ect
iveRateofi
nterest
,if
rat
eofi nter
esti
s10%PAandt i
mei soneyearand
i
nterestiscompoundedhal
fyearl
y:
Sol
uti
on:
R=10% =>r
=0.
10
T=1y
ear=>n=2
Soef
fect
iveROI=(
1+r
/n)
^n-1=(
1+0.
10/
2)^
2-1
=(
1+0.
05)
^2-1
=(
1.05)
^2-1
=1.
1025-1
=0.
1025
=10.
25%
Example2:Whatwil
lbeef
fect
iveRat
eofi
nter
est
,if
rat
eofinter
esti
s12%PAandcompounded
quart
erl
y:
Sol
uti
on:
R=12% =>r
=0.
12
T=1y
ear=>n=4
Soef
fect
iveROI=(
1+r
/n)
^n-1=(
1+0.
12/
4)^
4-1
=(
1+0.
03)
^4-1
=(
1.03)
^4-1
=1.
1255-1
=0.
1255
=12.
55%
Quest
ionsf
rom Macmi
ll
anbook:
(seey
ourbook)

Quest
ionNo10:Whatistheeff
ect
iveannual
i
nter
estrat
einf
oll
owingcases:
A)12%Compoundedmont
hly
B)8%compoundedev
ery4mont
hs
Sol
uti
on:A)

R=12% =>r
=0.
12
T=1y
ear=>n=12
Soef
fect
iveROI=(
1+r
/n)
^n-1=(
1+0.
12/
12)
^12-1
=(
1+0.
01)
^12-1
=(
1.01)
^12-1
=1.
1268-1
=0.
1268
=12.
68%
Sol
uti
on:B)
R=8% =>r
=0.
08
T=1y
ear=>n=12/
4=3
Soef
fect
iveROI=(
1+r
/n)
^n-1=(
1+0.
08/
3)^
3-1
=(
1+0.
027)
^3-1
=(
1.027)
^3-1
=1.
0832-1
=0.
0832
=8.
32%

Quest
ionNo17( C):Aquarterl
yrepayment
sofa
l
oancarryanint
erestrateof8%perannum.Whati
s
t
heeffecti
veannualrateofi
nterest
.
(
Exer
ciseony
ourown)
Exer
cisef
ory
ou:
Whatwi
llbeef
fect
iver
ateofi
nter
est
1)8%compoundedhal
fyear
ly
2)16%compoundedquar
ter
ly
3)6%compoundedev
ery4mont
hs
4)24%compoundedev
ery2mont
hs
5)18%compoundmont
hly

Posty
ouransweri
nCommentsect
ion
Subscr
ibeCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er12:Ti
meVal
ueofMoney(
Par
t-
II
I)

Whatwewi
llst
udy:
*
Howt
oCal
cul
atePr
esentv
alueofmoney?
*
Howt
oCal
cul
ateFut
urev
alueofmoney
*Someexampl
es&MacMi
ll
anbook'
sunsol
ved
quest
ions.
*
Pract
iceQuest
ions.

Compounding:IfPr
esentval
ueofmoneyi
sknown
andy ouf
indthecorr
espondi
ngFut
ureval
uet
henis
cal
led.
Discounti
ng:IfFut
urevalueisknownandyoufi
nd
thecorrespondi
ngPresentvaluet
henthi
siscal
l
ed
Discounti
ng.

Subscr
ibeCAI
IBWI
THASHOKonYouTube
For
mul
a:

For
mul
a:
1-
Fut
ureVal
ue=Pr
esentVal
ue*
(1+r
)^n
2-
C(n)
=C(
0)*(
1+r
)^n

3-PV=FV/
(1+r
)^n
For
mul
a:
FV=PV*(
1+r
1)*
(1+r
2)*
(1+r
3)*
(1+r
4)

Example1:Presentval
uei
sRs10000and
i
ntrestr
atei
s12%PA.Whatwi l
lbethe
val
ueattheendof :
A)1year,
ifi
nter
esti
scompounded
quar
ter
ly
B)3year
,ifi
nter
esti
scompoundedhal
f
year
ly

Sol
uti
onA):
PresentValuei
sgi
venandweneedt
ofi
nd
futur
evalue.
Her
eR=12%=>R=3% r
=0.
03
T=1y
ear=>n=4
FV=PV*
(1+r
)^n=10000*
(1+.
03)
^4
=10000*
(1.
03)
^4=10000*1.
12550881
=11255.
08/
-
Sol
uti
onB):
NowR=12%=>R=6% r
=0.
06
T=3y
ear=>n=6
FV=PV*
(1+r
)^n=10000*
(1+.
06)
^6
=10000*
(1.
06)
^6=10000*1.
41851911
=14185.
19/
-
Example2:Cashf
lowatt heendofone
yeari
sRs10000.Discountrat
eis8%at
quart
erl
yrest
s.Whatisthepresentv
alue?
Sol
uti
on:
NowR=8%=>R=2% r
=0.
02
T=1y
ear=>n=4
FV=PV*
(1+r
)^n
10000=PV*(
1+.
02)
^4
10000=PV*(
1.02)
^4
10000=PV*1.
0824321
PV=10000/
1.0824321=9238.
45/
-
Example3:Ifr
ateofint
eresti
s8%PAt hen
howmuchIneedt oinvestinPPF(
orany
otherscheme)togetRs5,00,
000/
-atthe
endof?
A)1y
ear
,ifcompoundedaty
ear
lybasi
s
B)3year
sifcompoundedatHal
fyear
ly
(Tr
yyour
self
)

Sol
uti
onA:
NowR=8%=>r
=0.
08
T=1y
ear=>n=1
FV=PV*
(1+r
)^n
5,
00,
000=PV*(
1+.
08)
^1
5,
00,
000=PV*1.
08
PV=5,
00,
000/
1.08
=4,
62,
962.
96/
-
Sol
uti
onB:
NowR=8%=>R=4%=>r
=0.
04
T=3y
ear=>n=6
FV=PV*
(1+r
)^n
5,
00,
000=PV*(
1+.
04)
^6
5,
00,
000=PV*(
1.04)
^6
5,
00,
000=PV*1.
2653190
PV=5,
00,
000/
1.2653190
=3,
95,
157.
26/
-
Quest
ionsf
rom MacMi
ll
anbook:
(
seey
ourbook)

Quest
ionNo11: IfIinv
est5000Rstoday
andexpecttosellatRs10000in8years.I
f
i
nter
estrateis5%PA, isi
tagooddeal?
Whatifi
nterestr
ateis12%?
Sol
uti
onPar
tI:
NowR=5% =>r
=0.
05
T=8y
ear=>n=8
FV=PV*
(1+r
)^n
10000=PV*(
1+.
05)
^8
10000=PV*(
1.05)
^8
10000=PV*1.
47745544
PV=10000/
1.47745544=6768.
39/
-
Soifyouinvesti
nbankRs6768/ -at5%PA
i
nterestt
henonlyyouwil
lget10000Rsi n
8years.Butasperquest
ionheinvestonl
y
5000andget10000i n8year
s.Soi tsa
gooddeal.Grabitman.
Sol
uti
onPar
tII
:
NowR=12% =>r
=0.
12
T=8y
ear=>n=8
FV=PV*
(1+r
)^n
10000=PV*(
1+.
12)
^8
10000=PV*(
1.12)
^8
10000=PV*2.
47596318
PV=10000/
2.47596318=4038.
83/
-
(
Notagooddeal
)

Subscr
ibeCAI
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Questi
onNo17(a):IfAinvestRs100at
7%inter
estr
atefor3years,Whatwil
lbe
theval
ueattheendof3y ears?
Sol
uti
on:
R=7%=>r
=0.
07
T=3y
ear=>n=3
FV=PV*
(1+r
)^n=100*
(1+.
07)
^3
=100*
(1.
07)
^3=100*1.
225043
=122.
50/
-

Subscr
ibeCAI
IBWI
THASHOKonYouTube
QuestionNo17(
d):Fi
ndtheint
erestr
ate.
Presentval
uei
s100Rs.Futur
evaluewil
l
becomeRs115.76in3year
s?
Sol
uti
on:
T=3y
ear=>n=3
FV=PV*
(1+r
)^n
115.
76=100*
(1+r
)^3
(
1+r
)^3=115.
75/
100
(
1+r
)^3=1.1575
(
1+r
)=1.
05
r
=.05=>R=5%

Subscr
ibeCAI
IBWI
THASHOKonYouTube
Quest
ionNo17(
g):Ibuyapropert
yforRs
3Lakhandpl
antoselli
tin5year
sat4
Lakh,
a)Whati
spresentv
alueofsel
li
ngpr
icei
f
i
nter
estr
atei
s8%
b)I
sthei
nvest
mentat
tract
ive?
Sol
uti
on:
NowR=8% =>r
=0.
08
T=5y
ear=>n=5
FV=PV*
(1+r
)^n
4,
00,
000=PV*(
1+.
08)
^5
4,
00,
000=PV*(
1.08)
^5
4,
00,
000=PV*1.
46932808
PV=4,
00,000/
1.46932808=2,
72,
233/
-
(Notagooddeal)
Subscr
ibeCAI
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THASHOKonYouTube
QuestionNo17(i
):Iftheinterestr
ate
changesfrom 8%thisyeart o10%next
year.Whatist
hefuturevalueofRs100in
2y ear
s?
Whati
spresentv
alueofRs100t
obe
r
ecei
vedaft
er2years?
Sol
uti
on:
R1=8%=>r
1=0.
08
R2=10%=>r
2=0.
10
FV=PV*
(1+r
1)*
(1+r
2)=100*
(1+.
08)
*(1+.
10)
=100*
1.08*
1.10=100*
1.188
=118.80/
-

Subscr
ibeCAI
IBWI
THASHOKonYouTube
Exer
cisef
ory
ou:

Quest
ion1:IfRam inv
est10000Rsf
or3yearsand
rat
eofint
eresti
s10%compoundedquart
erlythen
whatwil
lhegetafter3year
s?
Questi
on2:Iwantbuyapl otin5lacandwil
lsel
lit
i
n8l acaf
ter4years,
rateofinter
esti
s8%PAi n
banksoshouldIbuythehouseorshouldIdeposi
t
themoneyinbank?
Questi
on3:IfIwi
llgetRs20000af
ter5yearsand
rat
eofint
eresti
s9%t henwhatist
hepresentval
ue
ofthi
sinv
estment?
Question4:I
fpresentval
uei
s10l acandratrof
i
nterestforf
ir
styearis10%forsecondyearis12%
fort
hirdyearis8%the.Whatwil
lbethefutureval
ue?
Quest
ion5:MyfriendgavemeRs40000on
compoundint
erestof4%butcompoundedmonthl
y,
howmuchIneedt opayhi
m af
ter3y
earstogi
veup
thi
sdebt.
Questi
on6:Fut
ureval
ueis1lacanddiscount
fact
oris0.
8876thenwhati
sthepresentval
ue?
Questi
on7:IfIi
nvest10l
aci
nPPFhav ing8%rat
e
ofi
nterestt
henhowmuchIwillgetaf
ter15year
s?
Question8:Mydaughterwilltakeadmissi
onin
Engineeri
ngcoll
egeafter4y earsandshebeedt o
deposit6lactogetadmissiont henhowmuch
shouldIinvesti
frat
eofinterestis10%sot hatIcan
giv
et hemoneyf orheraddmi sonontime.
Quest
ion9:
FV=30000/
-,R=20%,
T=2y
ear
sthen
f
indPV?
Quest
ion10:PV=6000/
-,R=12%,
T=3y
ear
sthen
fi
ndFV?

Posty
ouransweri
nCommentsect
ion

Subscr
ibeCAI
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THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er12:TIMEVALUEOFMONEY
(
ANSWERS)

ANSWERSAREAVAILABLEINSMALL(
)in
eachquest
ion

CAI
IBABM CHAPTER12PART-
I
(
RULEOF72)

EXERCI
SE(
Plzsol
vei
t)
1)Howmuchti
mewi lli
ttakef
orRs1000t
o
become2000i
fint
erestrat
eis
a)9% (8y
ear
s)
b)6% (12y
ear
s)
c)24% (
3year
s)
d)18% (
4year
s)
1)Howmucht i
mewi l
litt
akeforRs20000t
o
become80000ifi
nter
estrat
eis
a)9% (
16y
ear
sappr
ox)
b)6% (
24y
ear
sappr
ox)
c)24%(
6year
sappr
ox)
d)18%(
8year
sappr
ox)
*
***
***
****
***
***
****
***
***
****
***
***
****
***
*
*
***
***
****
***
***
****
***
*
CAI
IBABM CHAPTER12PART-
II
(
CALCULATEEFFECTI
VERATEOF
I
NTEREST)
Quest
ionNo17( C):Aquarterl
yrepayment
sofa
l
oancarryanint
erestrateof8%perannum.Whati
s
t
heeffecti
veannualrateofi
nterest
.
(
Exer
ciseony
ourown)

Answer:8.
24%

Exer
cisef
ory
ou:
Whatwi
llbeef
fect
iver
ateofi
nter
est
1)8%compoundedhal
fyear
ly(
8.16%)
2)16%compoundedquar
ter
ly(
16.
98%)
3)6%compoundedev
ery4mont
hs(
6.12%)
4)24%compoundedev
ery2mont
hs(
26.
53%)
5)18%compoundmont
hly(
19.
56%)
*
***
***
****
***
***
****
***
***
****
***
***
****
***
*
*
***
***
****
***
***
****
***
*
CAI
IBABM CHAPTER12PART-
II
I
(
CALCULATEPRESENTVALUE/
FUTURE
VALUE)

Exer
cisef
ory
ou:

Quest
ion1:IfRam inv
est10000Rsfor3yearsand
rat
eofint
eresti
s10%compoundedquar ter
lythen
whatwil
lhegetafter3year
s?(Rs13448.
89)
Questi
on2:Iwantbuyapl otin5lacandwil
lsel
lit
i
n8l acaf
ter4years,
rateofinter
esti
s8%PAi n
banksoshouldIbuythehouseorshouldIdeposi
t
themoneyinbank?
(Ishoul
ddeposi
tcashof5lac.i
nbank,
IfIbuyt
he
housethenI
needRs588235.29aspr
esent)
Questi
on3:IfIwi
llgetRs20000after5yearsand
rat
eofint
eresti
s9%t henwhatisthepresentval
ue
ofthi
sinv
estment?(Rs12995.5/
-)
Question4:Ifpresentval
uei
s10l acandratrof
i
nterestforfi
rstyearis10%forsecondyearis12%
fort
hirdyearis8%t he.Whatwil
lbethefutureval
ue?
(Rs13,30,560/-
)
Quest
ion5:MyfriendgavemeRs40000on
compoundint
erestof4%butcompoundedmonthl
y,
howmuchIneedt opayhi
m af
ter3y
earstogi
veup
thi
sdebt.(
Rs45,035)
Questi
on6:Fut
ureval
ueis1lacanddiscount
fact
oris0.
8876thenwhati
sthepresentval
ue?
(88,
760)
Questi
on7:IfIi
nvest10l
aci
nPPFhav ing8%rat
e
ofint
erestt
henhowmuchIwillgetaf
ter15year
s?
(31,
72,169)
Question8:Mydaughterwilltakeadmissi
onin
Engineeri
ngcoll
egeafter4y earsandshebeedt o
deposit6lactogetadmissiont henhowmuch
shouldIinvesti
frat
eofinterestis10%sot hatIcan
giv
et hemoneyf orheraddmi sonontime
.
(4,
09,
808)
Quest
ion9:
FV=30000/
-,R=20%,
T=2y
ear
sthen
f
indPV?(
20833.
33)
Quest
ion10:PV=6000/
-,R=12%,
T=3y
ear
sthen
fi
ndFV?(8429.
57)

*
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***
****
***
***
****
***
***
****
***
*
*
***
***
****
***
***
****
***
*
CAI
IBABM CHAPTER12PART-
IV
(
ORDI
NARYANNUI
TYNUMERI
CALS)

Exer
cisef
ory
ou:
Questi
on1:Calcul
ateFVofRs5000whichis
deposit
edattheendofeachyearf
or10years.Rat
e
ofint
eresti
s8%andcompoundedquarter
ly?
(
3,02,
009)
Question2:Mohandeposi t2000Rseachyearf
or8
years,i
frat
eofinter
estis12%t henwhati
sthe
presentval
ueofinvest
ment ?(
9,935.
27)
Question3:Icanbuyabikeeit
herpay i
ngcashRs
80000orRs20000pery earfornext5y ears,
ifr
ate
ofint
er esti
s6%thenwhichoptionshouldIchoose?
(paythecash80000Rsast hePr esentval
ueof
20000Rspery earwil
lbe84248Rs)
Questi
on4:MadanneededRs10Lacforher
daught
ermarri
age,howshoul
dheinvesteachyear
i
frateofi
nter
esti
s10%t ogetRs10Lacatt heend
of10year
s.(62,
747)
Quest i
on5: I
fIdeposi
tRs40000pery earfornext5
yearsandr at
eofinter
estis12%t hencany ou
calculatet
hepresentvalueandfutur
ev aluebothof
thi
si nvest
ment?(PV=1,44,191andFV=2,54,114)

*
***
***
****
***
***
****
***
***
****
***
***
****
***
*
*
***
***
****
***
***
****
***
*
CAI
IBABM CHAPTER12PART-
V
(ANNUI
TYDUENUMERI
CALS)

Exer
cisef
ory
ou:
Questi
on1:Calcul
ateFVofRs1000whichis
deposi
tedatthebeginni
ngofeachy
earfor6year
s.
Rateofint
eresti
s12%andcompoundedy ear
ly
?(9089)
Questi
on2:Ajaydeposi
t20000Rseachy earf
or5
year
sinthebegi
nning,i
frat
eofint
eresti
s6%t hen
whatisthepr
esentval
ueofinv
estment?(
89307)

Question3:Icanbuyacarei t
herpayingcashRs
120000orRs30000pery earfornext4year si
nthe
beginning,i
frat
eofint
erestis5%t henwhi ch
optionshoul
dIchoose?(pay30000pery earas
presentval
ueofthisi
s1,11,697)
Quest
ion4:IfIdeposi
tRs40000pery
eari
nthe
begi
nningofyearfornext20y
ear
sandrat
eof
i
nter
estis8%thencanyoucal
cul
atethepr
esent
v
alueandfutur
evaluebot
hofthi
sinv
estment?
(
FV=19,76,
940&PV=4,25,
206)

Joi
nCAI
IBWI
THASHOKonYouTube
*
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***
****
***
***
****
***
***
****
***
***
****
***
*
*
***
***
****
***
***
****
***
*
CAI
IBABM CHAPTER12PART-
VI
(Cal
cul
ateNetPr
esentVal
ue)

Quest
ionsf
rom MacMi
ll
anbook:
(
seey
ourbook)

Questi
on16:ABCCompanyhast hr
eeproj
ectst
o
choose.Asaconsul
tanty
ouwil
ladvi
cewhich
proj
ect:(Pr
act
iceonyouown)
CashFlowsar
easf
oll
ows:
Allamounti
nLakhs
Rupees
Pr
oject1:Dur
ati
on5y
ear
s
Begi
nni
ngcashf
low=Rs100
Cashi
nfl
ows(
att
heendofy
ear
s)
Year1:Rs30
Year2:Rs30
Year3:Rs30
Year4:
Rs10
Year5:Rs10

Pr
oject2:Dur
ati
on5y
ear
s
Begi
nni
ngcashf
low=Rs100
Cashi
nfl
ows(
att
heendofy
ear
s)
Year1:Rs5
Year2:Rs15
Year3:Rs25
Year4:
Rs35
Year5:Rs50

Pr
oject3:Dur
ati
on15y
ear
s
Begi
nni
ngcashf
low=Rs100
Cashi
nfl
ows(
att
heendofy
ear
s)
Year1t
o10:Rs20
Year11t
o15:Rs10
Ift
hecostofcapi
tali
s8%thenwhi
chpr
oject
shoul
dcompanychoose.

(
NPVPr
oject1:-8.
53
NPVPr
oject2:-16.
51
NPVPr oj
ect3:+52.
67Socompanyshoul
d
chooseProj
ect3asithav
e+veNPV)

Exer
cisef
ory
ou:
Quest
ion1:Consi
dert
hef
oll
owi
ngcashf
low:
Today-payoutofRs20000/
-
Af
teroney
ear-payi
nofRs6000/
-
Af
tert
woy
ear
s-payi
nofRs8000/
-
Af
tert
hreey
ear
s-pay
outofRs5000/
-
assumingdiscountrat
eof8%andcompoundi
ngi
s
onannualbasis.Cal
cul
ateNPVoft
heabove.

(
-11,
558)
Quest
ion2:Consi
dert
hef
oll
owi
ngcashf
low:
Today-payi
nofRs10000/
-
Af
tert
hreey
ear-payoutofRs16000/
-
Af
terf
oury
ear
s-payi
nofRs60000/
-
Af
teroney
ear
s-pay
inofRs50000/
-
assumingdiscountrat
eof6%andcompoundi
ngis
onannualbasis.Cal
cul
ateNPVofabov
ecashfl
ow.
(
+91,
230)
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er17:BONDI
NVESTMENT(
PART-
II
)

Whatwewi
llst
udy:

*
Bondpr
iceandy
iel
d

For
mul
atobeused:

PV=

PV= *[ ]

BONDPRI
CESANDYI
ELD:
Questi
on:SupposeIndianGovrai
sedmoneyby
sel
li
ng6%couponbondhav ingmat ur
it
yinJul
y
2025.
Eachhav efacevalue(
parvalue)ofRs1000/
-.
Supposeyoubuyt hebondinJuly2022.
Ti
mel
ine Coupon Facev
alue Tot
alyou
(
FV) get

Jul
y2023 60 60
Jul
y2024 60 60
Jul
y2025 60 1000 1060

Therealquest
ioni
showmuchyoucanpayf
ort
his
st
ream ofcashfl
ow?.Means
*
Whatwi
llbet
heBondpr
iceor
*
Whatwi
llbeMar
ketPr
iceor
*
Atwhatpr
iceshoul
dthecompanysel
lor
*Atwhatpr
icey
ouwoul
dli
ket
opur
chase)
*Tof
indoutweneedt ocompar
ewithi
nter
estr
ate
onsi
milarsecur
it
iespr
evai
li
ngatt
hatpoi
ntoft
ime.
Sayf
or3y
ear
smat
uri
tyof
ferar
etur
nof5.
6%.

*Nowweneedtof
indthepresentv
alueofeach
cashf
lowt
hatwewil
lrecei
vein3y ear
s.
Way1:
Cal
cul
atef
inaly
earcoupon&FVsepar
atel
y:
Ti
mel
ine Coupon Pr
esent
v
alue
Jul
y2023(
1Y) 60
Jul
y2024(
2Y) 60
Jul
y2025(
3Y) 60
Jul
y2025(
3Y) 1000

Pr
esentVal
ue(
bond)=PV(
coupon)+PV(
FV)
1)
Presentv
alueofcoupon:

PV= + +

Now C=60
R=5.
6=>r
=.056

PV= + +

PV=56.
82+53.
80+50.
94=161.
56/
-
Pr
esentv
alueoff
acev
alue(
parv
alue)
:

PV=
Nowfacev
alue=1000/
-
n=3
r=.
056

PV= =

PV=849.
20
Tot
alpr
esentv
alue=PV(coupon)
+PV(
facev
alue)
PV=161.
56+849.20=1010.76
Way2:
Cal
cul
atef
inaly
earcoupon&FVt
oget
her
:
Ti
mel
ine Coupon Pr
esent
v
alue
Jul
y2023(
1Y) 60
Jul
y2024(
2Y) 60
Jul
y2025(
3Y) 1060

Pr
esentv
alue:

PV= + +

Now C=60,
C+FV=1060,
R=5.
6=>r =.
056

PV= + +

PV=56.
82+53.
80+900.
14=1010.
76/
-
Way3:
UsethePr
esentval
uef
ormul
aofdi
scount
ingand
ordi
nar
yannui
ty.
Nowconsi
dert
woquest
ions:
Q1-Whatist hepresentv
alueofi
nvest
mentin
whichyoureceive60Rsatendofeachyearf
or3
yearsandi
nterestrat
eis5.6%?
Q2-Whatist
hepresentval
ueofRs1000whi
chy
ou
wi
llr
ecei
veaf
ter3yearsandROIi
s5.6%.
Nowaddanswersofquest
ion1and2andy
ouwi
ll
gett
heanswer
.
Q1-Or
dinar
yAnnui
tyf
ormul
a

PV= *[ ]

A=60
r=.
056
n=3
PV= *

PV(
coupon)
= * =161.
56

Q2-Di
scount
ingf
ormul
a

PV=
Nowfacev
alue=1000/
-
n=3
r=.
056

PV= =

PV(
facev
alue)
=849.
20

Tot
alpr
esentv
alue=PV(
coupon)
+PV(
facev
alue)

PV(
bond)= *[ ]+

PV=161.
56+849.
20=1010.
76
*
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***
***
***
***
***
***
***
***
***
***
***
***
***
***
***
***
Exampl
e2:FV=1000,
CR=10%,
T=5y
ear
s
(
tryony
ourendanduseal
l3met
hods)

*
Couponpay
menti
nhal
fyear
lycompoundi
ng

Ti
mel
ine Coupon Facev
alue Tot
alyou
(
FV) get

Jan2023 30 30
Jul
y2023 30 30
Jan2024 30 30
Jul
y2024 30 30
Jan2025 30 30
Jul
y2025 30 1000 1030

Cal
cul
atet
hepr
esentv
alueofbond:
Way3:

PV(
BOND)=PV(
coupon)
+PV(
facev
alue)

PV= *[ ]+

A=30,
r=0.
028,
n=6
PV= * +

PV= * +

PV=163.
60+847.
31=1010.
91/
-

Way2:
PV= + + + + +

PV=1010.
91/
-
Pr
act
ice:
Q1-Whatist
hepriceofbondwhi
chhav
eface
val
ueofRs1000andcouponrat
eis8%andit
matur
esin3year
s.
Q2-Howmuchy ouarewill
ingt
opayforabond
whichhav
ecouponofRs100Rsandf aceval
ueis
1000Rsandmaturi
typer
iodis8year
s.
Q3-Whatisthesel
li
ngpri
ceofabondhav
ing
matur
ityi
n20yearsandcouponr
atei
s12%andpar
val
ueis100Rs.
Q4-Whatwil
lbethepur
chasepri
ceofabondif
couponr
atei
s4%andmat uri
tyi
n6years.(
Face
val
ueisRs10000)
Q5-Whatwil
lbethesel
li
ngpri
ceofabondwit
hpar
val
ueofRs10onlyandcouponrat
eis14%and
matur
it
yin12year
s.
Q6-Whatwi l
lbeyouransweri
fcouponi
s
compoundedhal
fyearl
y(quest
ion1to5)
.
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er17:BONDI
NVESTMENT(
PART-
II
I)

Whatwewi
llst
udy:

*
Howt
oCal
cul
ateCur
renty
iel
d
*
Howt
oCal
cul
ater
ateofr
etur
n
*
Rel
ati
onshi
pbet
weenbondpr
iceandi
nter
estr
ate
*
Sel
l
ingatPr
emi
um
*
Sel
l
ingatDi
scount
1>BONDPRI
CEANDI
NTERESTRATES:
Questi
on1:Canyoucal
culatethepresentv
alueofBond
i
fcouponratei
s6%andFacev al
ueis1000andmat ur
it
y
peri
odis3year
s.Requi
redrateofinter
esti
s(sol
veon
yourown)
1-5.
6%
2-
6%
3-
10%
I
nter
estr
ate Bondv
alue Concl
usi
on

5.
6% 1010.
76 I
fmarketrateisl
essthan
Couponratethenbondsel
ls
morethanfaceval
ue
6% 1000 I
fmarketr
ate=couponrat
e
bondsellatf
acevalue
(
couponr
ate)
10% 900.
55 Ifmar ketr
ateismorethan
Couponr at
ethenbondsell
s
lessthanfaceval
ue

Exer
cise:

Couponr
ate I
nter
estr
ate BOND Mor
e/Less
Pri
ce
10% 6% FV
8% 14% FV
16% 12% FV
6% 7% FV
2% 2% FV
2>Cur
rentYi
eld:
CY=COUPON/
MP
Example1:I
fyoupayRs1000andyougetRs100as
couponperyeart
henwhati
scurr
entyi
eld?
Sol
uti
on:Cur
rentYi
eld=Coupon/
MP
CY=100/
1000=0.
1=10%

Example2:I
fyoupayRs900andy oucouponr
atei
s12%
peryeart
henwhatiscur
renty
iel
d?
Sol
uti
on:Cur
rentYi
eld=Coupon/
MP
CY=120/
900=0.
1333=13.
33%
(
assumef
acev
aluei
s1000)
Exampl e3:A6y earbondwit
hparv al
ue1000hasa
currentyi
eldof7.
5%andcouponrateis8%.Whatist
he
bondpr i
ce?(seeMacMill
anbookexerci
sequest
ionno4)
Soluti
on:
Couponr
ate=8%socoupon=80Rs.
CY=7.
5%cy
=.075
NowCY=Coupon/
MP
.075=80/
MPMP=80/
.075=1066.
70/
-
Exer
ciseQuest
ion:
EQ1:Ifsel
li
ngpr
iceofabondi
sRs1136andcoupon
rat
eis10%ascouponperyeart
henwhati
scurr
entyi
eld?
EQ2: I
fmarketpr
iceofabondisRs800andy
ouget
couponofRs132pery eart
he
1-
Whati
scouponr
ate?2-Whati
scur
renty
iel
d?
EQ3:Ify
oupayRs1200andyougetRs60ascouponper
yeart
henwhati
scur
renty
iel
dandwhatiscouponr
ate?
EQ4:I
fcurrenty
iel
dis10%andMar ketpr
iceofbondi
s
980Rsthenwhatisthecouponr
ate?
EQ5:Ifcur
rentyi
eldi
s15%andthecouponr
atei
s12%
thenwhatistheMPofcoupon?(
FV=100Rs)

Sel
li
ngatPr
emi
um :
Whenbondissoldatmor
ethanit
sfacev
aluet
hen
i
tiscal
ledsel
li
ngatpr
emium.(
FV=1000,MP=1120)
Sel
li
ngatDi
scount:
Whenbondissol
datlesst
hani
tsfacev
aluet
heni
t
i
scal
ledsel
li
ngatdi
scount
.(FV=1000,
MP=860)
3>Rat
eofr
etur
n:(
ROR)

Rat
eofr
etur
n=
(
coupon+Pr
iceChange)/
Inv
est
ment
Pr
iceChange=Fi
nalpr
ice-Mar
ketpr
ice
Exampl
e1:I fy
oubuyabond6%couponbondf or
Rs1010/-andselli
tnexty
earf
orRs1020/
-then
fi
ndrat
eofr et
urn?
Sol
uti
on:Rat
eofr
etur
n=
(
coupon+Pr
iceChange)/
Inv
est
ment
ROR=(
60+10)/
1010=0.
0693=6.
93%
Example2:Couponi
s100Rsandbondpr icewas
900Rswheny oupurchasedi
tandnowthecurr
ent
marketpr
iceofbondis1050sowhati
sy ouROR?
Rat
eofr
etur
n=
(
coupon+Pr
iceChange)/
Inv
est
ment
ROR=(
100+150)/
900=.2778=27.
78%
Exer
cise:

EQ6:Couponis60Rsandbondpr i
cewas820Rs
wheny oupur
chasedi
tin2012andnowin2018t
he
marketpri
ceofbondi
s810sowhati sy
ouROR?

EQ7:bondsel li
ngpri
cewas900Rswheny ou
purchaseditin2102andnowit'
scurr
entpriceis
facevalue,t
heRORi s20%thenwhatistheinter
est
amountt hatyouareget
ti
ngeachyearandwhati s
couponr at
e?
EQ8:Couponrat
eis6% andbondpri
cewas900
Rswhenyoupurchasedi
t,i
fRORis10%thenwhat
i
sthecurr
entpri
ceofbond?
EQ9:Couponratei
s8% andcurr
entpr
iceofbond
pri
cei
s1080Rs, i
fRORi
s12%t henwhatist
hewas
thepr
iceofbondwheny
oupurchasedi
t?
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er18:Li
nerPr
ogr
ami
ng

Whatwewi
llst
udy:
*Whati
sLi
nearPr
ogr
ammi
ng

Li
nearPr
ogr
ammi
ng(
LP):
LPrefert
oMathemati
calt
echni
quet
hati
susedto
al
locatet
hel
imit
edresour
cesamongcompet
ing
demandinanopti
malway.
Toobtai
nedt
heopti
malsol
uti
ont heprobl
ems
shoul
dbestr
uct
uredint
ospart
icularf
ormat.
Ithasbeenf oundthatl
inearpr
ogrammi nghas
usefulappl
icati
onstofi
nancialdeci
sions.

Thet
ypeofprobl
em shouldbeli
nearconst
rai
nts
andt
hedecisi
onmakermustbet ryi
ngtomaximize
someli
nearobj
ect
ivefuncti
on.
Exampl
e:

Supposeaf
ir
mispr
oduci
ngf
anand
Sel
li
ngpr
iceofeachf
ani
s1000Rs.
Pr
oduct
ioncosti
s500Rs
Mar
ket
ingcosti
s200
Pr
ofi
tis300
Nowf
ir
m can'
tpr
oduce1Lacuni
tperday
,why
?
Becausefi
rm needtooperateundereconomi
c,
fi
nanci
alandphy si
calconst
rai
nts.
Li
keyouwantt
ocl
earcai
ibbuty
oucan'
tst
udy24
hour
s,why
?
1)Fi
rm needcapi
talf
orr
awmat
eri
al
2)Mar
ketmaynotabsor
bthewhol
eout
put
.
3)
Capaci
tyconst
rai
nts
4)
Labourav
ail
abi
li
ty
5)
Rawmat
eri
alav
ail
abi
li
ty
Underwhatcondit
ionuset
heLi
near
Progr
amming( LP)

1-Ast
henamei
mpl
iesal
lequat
ionshoul
dbel
inear
.
Forexampl
eif4personi
sneededropr
oduce1f
an
then12per
sonshouldbeneededf
or3fans.
2-
Theconst
rai
ntsar
eknownanddet
ermi
nist
ic.
3-Mosti
mportantrul
eisthatallt
hevari
abl
es
shoul
dtakenon-negati
vevalues(meanszer
oor
morethanzer
o)
4-
Deci
sionv
ari
abl
esar
edi
vi
sibl
e.

Joi
nCAI
IBWI
THASHOKonYouTube
Howt
omakeequat
ionf
orLP:

Exampl
e1:
Af
ir
m pr
oducer
adi
oandTV.
Eachr
adi
o:
Wages:500
Mat
eri
al:500
Tot
alcost=1000
Sel
li
ngpr
ice=2000
Pr
ofi
t=1000
Pr
oduct
ionneed
Machi
net
ime3hour
s
Assembl
yti
me1hour
s

Joi
nCAI
IBWI
THASHOKonYouTube
EachTel
evi
sion:
Wages:2500
Mat
eri
al:1500
Tot
alcost=4000
Sel
li
ngpr
ice=6000
Pr
ofi
t=2000
Pr
oduct
ionneed
Machi
net
ime1hour
s
Assembl
yti
me1hour
s

Av
ail
abi
li
tyofMachi
net
ime=10hour
s
Av
ail
abi
li
tyofassembl
yti
me=4hour
s
Av
ail
abi
li
tyoff
und=12000
(
topayf
orwagesandmat
eri
als)

HowmanyTVandradi
oshoul
dthef
ir
m make
t
oear
nmaximum prof
it
s.
Radi
o TV
Wages 500 2500
Mat
eri
al 500 1500
Tot
alcost 1000 4000
Sel
li
ngpr
ice 2000 6000
Pr
ofi
t 1000 2000
Machi
net
ime 3hour
s 1hour
Assembl
y 1hour 1hour

Const
rai
nts:
Fund 12000Rs
Machi
net
ime 10hour
s
Assembl
yti
me 4hour
s

HowmanyTVandradioshoul
dthef
ir
m maket
o
ear
nmaxi
mum pr
ofit
s.
Let
'smakeequat
ion:
Lett
otalr
adi
ospr
oducedbyf
ir
m =x
AndTot
alTVpr
oducedbyf
ir
m =y
Nowweneedt
omaxi
mizet
hepr
ofi
tso

Obj
ect
ivef
unct
ion
Z=1000x+2000y

*
Ifx=4andy
=2
Thenz=4000+4000=8000
*
Ifx=2andy
=4
Thenz=2000+8000=10000
*
Ifx=0andy
=6
Thenz=0+12000=12000
1)Capaci
tyconst
rai
nts:Machi
net
ime
3x+1y
<=10
3x+y
<=10

2)Capaci
tyconst
rai
nt:
Assembl
yti
me
1x+1y
<=4
x+y
<=4

3)Fundconst
rai
nts:
1000x+4000y<=12000
x+4y<=12
*
Ifx=4andy
=2
4000+8000=12000
*
Ifx=2andy
=4
2000+16000=18000
*
Ifx=0andy
=6
0+24000=24000
4)Nonnegat
iveconst
rai
nt:
x>=0,
y>=0

Exampl
e2:
Acompanymanuf
act
urecr
icketbatandchessset
.
Eachbatgi
ve2Rspr
ofi
tandeachchesssetgi
ve4
Rsprof
it
.

Wor
kshop1 Wor
kshop2 Wor
kshop3

Bat 4 2 0
Chess 6 6 1

Wor
kshop1 120hour
s
Wor
kshop2 72hour
s
Wor
kshop3 10hour
s
Let
'smakeequat
ion:
Lett
otalbatpr
oducedbyf
ir
m =x
AndTot
alchesspr
oducedbyf
ir
m =y
Nowweneedt
omaxi
mizet
hepr
ofi
tso

Obj
ect
ivef
unct
ion
Z=2x+4y
1)const
rai
nts:Wor
kshop1t
ime
4x+6y
<=120
2)Const
rai
nt:
Wor
kshop2t
ime
2x+6y
<=72
3)Const
rai
nt:
Wor
kshop3t
ime
0x+1y
<=10
y
<=10

4)Nonnegat
iveconst
rai
nt:
x>=0,
y>=0
Joi
nCAI
IBWI
THASHOKonYouTube
Chapt
er18:Li
nearPr
ogr
ammi
n(PART-
II
)

Whatwewi
llst
udy:
*Si
mpl
exmet
hod

Si
mpl
exMet
hod:
Exampl
e2:
Acompanymanuf
act
urecr
icketbatandchessset
.
Eachbatgi
ve2Rspr
ofi
tandeachchesssetgi
ve4
Rsprof
it
.

Wor
kshop Wor
kshop Wor
kshop
1 2 3
Bat 4 2 0
Chess 6 6 1

Wor
kshop1 120hour
s
Wor
kshop2 72hour
s
Wor
kshop3 10hour
s

Let
'smakeequat
ion:
Lett
otalbatpr
oducedbyf
ir
m =x
AndTot
alchesspr
oducedbyf
ir
m =y
Nowweneedt
omaxi
mizet
hepr
ofi
tso

Obj
ect
ivef
unct
ion
Z=2x+4y
1)const
rai
nts:Wor
kshop1t
ime
4x+6y
<=120
2)Const
rai
nt:
Wor
kshop2t
ime
2x+6y
<=72
3)Const
rai
nt:
Wor
kshop3t
ime
0x+1y
<=10
y
<=10

4)Nonnegat
iveconst
rai
nt:
x>=0,
y>=0

Joi
nCAI
IBWI
THASHOKonYouTube
Sol
uti
on:

Z=2x+4y
4x+6y
<=120
2x+6y
<=72
y
<=10
x>=0,
y>=0
4x+6y
<=120 4x+6y
+a=120
2x+6y
<=72 2x+6y
+b=72
y
<=10 y
+c=10
Z=2x+4y Z-
2x-
4y=0

4x+6y
+a=120 4x+6y
+a+0b+0c=120
2x+6y
+b=72 2x+6y
+0a+b+0c=72
y
+c=10 y
+0a+0b+c=10
Z=2x+4y Z-
2x-
4y+0a+0b+0c=0
Step1:Toremovethei
nequal
itywewil
ladd
vari
abl
esinequat
ionandthevari
abl
eiscal
ledsl
ack
vari
abl
e
4x+6y
+a=120
2x+6y
+b=72
y
+c=10
Nowwehav
etot
alx,
y,a,
b,cf
ivev
ari
abl
es.
St
ep2:Sowewi
llr
ewr
it
etheequat
ion
Z-
2x-
4y+0a+0b+0c=0
St
ep3:Rewr
it
etheconst
rai
ntequat
ional
so
4x+6y
+1a+0b+0c=120
2x+6y
+0a+1b+0c=72
0x+1y
+0a+0b+1c=10

Joi
nCAI
IBWI
THASHOKonYouTube
St
ep4:
Nowmakeat
abl
e:
Z x y a b c Sol Rt
o
1 -
2 -
4 0 0 0 0
0 4 6 1 0 0 120
0 2 6 0 1 0 72
0 0 1 0 0 1 10

Whenobject
ivefunct
ionlineorpr
ofi
tli
neshould
nothav
eanynegat i
vevaluethenwewillcal
lit
opti
malequat
ionsoluti
on.
Sol
vet
het
abl
e:
St
ep1:Findt
hemostnegat
iveval
ueinzl
ine.
Whichi
s-4sothi
swi
llbeourpi
votcol
umn.

Z x y a b c Sol Rt
o
1 -
2 -
4 0 0 0 0
0 4 6 1 0 0 120
0 2 6 0 1 0 72
0 0 1 0 0 1 10

St
ep2:Nowf
indr
ati
oforeachv
aluei
nsolcol
umn.

y Sol Rat
io
-
4 0
6 120 120/
6=20
6 72 72/
6=12
1 10 10/
1=10
Nowwechoosef
rom t
her
ati
ocol
umnt
hesmal
l
est
+vev
aluewhi
chi
s10.

Z x y a b c Sol
R1 1 -
2 -
4 0 0 0 0
R2 0 4 6 1 0 0 120
R3 0 2 6 0 1 0 72
R4 0 0 1 0 0 1 10

Now1i
sthepi
votel
ement
.
y y
-
4 0
6 0
6 0
1 1
Let
'swor
konR1:

Z x y a b c Sol
R1 1 -
2 -
4 0 0 0 0
R2 0 4 6 1 0 0 120
R3 0 2 6 0 1 0 72
R4 0 0 1 0 0 1 10

Z x y a b c Sol
R1 1 -
2 -
4 0 0 0 0
R4 0 0 1 0 0 1 10

Weneed0i
npl
aceof-4so
Wewi
lldo
R4-
>R4*
4
R1-
>R1+R4
R4-
>R4*
4
Z x y a b c Sol
R1 1 -
2 -
4 0 0 0 0
R4 0 0 4 0 0 4 40

R1-
>R1+R4
Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R4 0 0 4 0 0 4 40

Tabl
ewi
thnewR1v
alue:

Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 6 1 0 0 120
R3 0 2 6 0 1 0 72
R4 0 0 1 0 0 1 10
Let
'swor
konR2:

R2 0 4 6 1 0 0 120
R4 0 0 1 0 0 1 10

Weneed0i
npl
aceof6so
Wewi
lldo
R4-
>R4*
6
R2-
>R2-
R4

R4-
>R4*
6
R2 0 4 6 1 0 0 120
R4 0 0 6 0 0 6 60

R2-
>R2-
R4

R2 0 4 0 1 0 -
6 60
R4 0 0 6 0 0 6 60
Tabl
ewi
thnewR2v
alue:

Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 2 6 0 1 0 72
R4 0 0 1 0 0 1 10

Let
'swor
konR3:
R3-
6R4 0 2 0 0 1 -
6 12
R3 0 2 6 0 1 0 72
R4 0 0 1 0 0 1 10
6R4 0 0 6 0 0 6 60

R4-
>R4*
6
R3-
>R3-
R4
Tabl
ewi
thnewR3v
alue:
Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 2 0 0 1 -
6 12
R4 0 0 1 0 0 1 10

I
ter
ati
on2:
Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 2 0 0 1 -
6 12
R4 0 0 1 0 0 1 10

Joi
nCAI
IBWI
THASHOKonYouTube
x Sol Rat
io
-
2 40
4 60 60/
4=15
2 12 12/
2=6
0 10 10/
0

Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 2 0 0 1 -
6 12
R4 0 0 1 0 0 1 10
x x
-
2 0
4 0
2 1
0 0

Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 2 0 0 1 -
6 12
R4 0 0 1 0 0 1 10
R3-
>R3/
2
Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 1 0 0 .
5 -
3 6
R4 0 0 1 0 0 1 10
Wor
kwi
thR1:
Z x y a b c Sol
R1 1 -
2 0 0 0 4 40
R2 0 4 0 1 0 -
6 60
R3 0 1 0 0 .
5 -
3 6
R4 0 0 1 0 0 1 10

R3=2*
R3&R1=R1+R3
R1 1 0 0 0 1 -
2 52

R3=4*
R3&R2=R2-
R3
R2 0 0 0 1 -
2 6 36

Joi
nCAI
IBWI
THASHOKonYouTube
Z x y a b c Sol
R1 1 0 0 0 1 -
2 52
R2 0 0 0 1 -
2 6 36
R3 0 1 0 0 .
5 -
3 6
R4 0 0 1 0 0 1 10

I
ter
ati
on3:
Z x y a b c Sol R
R1 1 0 0 0 1 -
2 52
R2 0 0 0 1 -
2 6 36 36/
6
R3 0 1 0 0 .
5 -
3 6 6/
-3
R4 0 0 1 0 0 1 10 10/
1

Joi
nCAI
IBWI
THASHOKonYouTube
Z x y a b c Sol
R1 1 0 0 0 1 -
2 52
R2 0 0 0 1/
6 -
1/3 1 6
R3 0 1 0 0 .
5 -
3 6
R4 0 0 1 0 0 1 10

Z x y a b c Sol
R1 1 0 0 1/
3 1/
3 0 64
R2 0 0 0 1/
6 -
1/3 1 6
R3 0 1 0 1/
2 -
1/2 0 24
R4 0 0 1 -
1/6 +1/
3 0 4

Joi
nCAI
IBWI
THASHOKonYouTube
R1don'
thaveany-v
eval
uesooursol
uti
oni
s
opt
imum now:
Z x y a b c Sol
R1 1 0 0 1/
3 1/
3 0 64
R2 0 0 0 1/
6 -
1/3 1 6
R3 0 1 0 1/
2 -
1/2 0 24
R4 0 0 1 -
1/6 +1/
3 0 4

x=24
y
=4
Z=64

Fi
rm make24batand4chesstheni
twi
llear
n
maxi
mum prof
it
.Profi
tofRs64.

Joi
nCAI
IBWI
THASHOKonYouTube
St
eps:
1-Wr
it
etheequat
ioni
nli
nearequat
ionf
ormat
.
2-
Addt
hesl
ackv
ari
abl
es
3-
Maket
het
abl
e
4-
Nownov al
ueinzr owshoul
dbenegati
vefor
maximi
zati
on.Sopi ckthemost-v
evalueandthi
s
wi
llbeyourpivotcolumn.
5-Nowcalcul
aterat
ioofSolcolumnandpi
vot
columnandselectt
hesmallest+veval
ueandt
his
willbey
ourrow.
6-I
ntersect
ionofpivotr
owandpi votcolumni
s
cal
ledpivotelementanditshoul
dalwaysbeone
andrestvaluesincol
umnshoul dbezero.
7-Ifanyvaluei
nzcolumnisstil
l-vethenrepeat
step4,5and6.Stopwhennov al
uei nzrowis-ve
andthiswil
lbeyouropt
imum solut
ion.

Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er20:Fundament
alofHumanResour
ses
Management(PART-
I)
Whatwewi
llst
udy
?
*
Whati
sHumanResour
ce?
I
NTRODUCTI
ON:
"IWi
llPayMor
eForTheAbi l
it
yToDealWithPeopl
e
ThanForAnyOtherAbi
li
tyUnderTheSun”
:
Rockef
ell
er
Theeffect
iveut
il
isat
ionofpeoplei
nanyorgani
sed
eff
orthasalwaysbeenapressingprobl
em i
n
soci
ety.
Foralongtimemanagementt heori
eshav ebeen
charact
eri
sedbyasearchofuniversalsolut
ionto
provi
depracti
ti
oner
swithpri
nciplesthatcanbe
appli
edtoallki
ndsoforgani
sati
onswi thuniver
sal
success.
Thisi
smainl
yduetothef
actt
hatt
heor
gani
sat
ions
arepr
imar
il
ysoci
alsy
stems.
Joi
nCAI
IBWI
THASHOKonYouTube
Theycombinepeopl
eandsci
ence–humani
tyand
technol
ogy
.
I
tis,
theref
ore,
notpossi
bleforever
yorgani
sati
on
t
ohav ethesametypeofpeopleandsamelevelof
t
echnology.
Thus,t
hehumanbehav i
ourinr el
ationt oan
organi
sati
onhasassumedagr eatsi gnifi
canceand
formsthemajorsubjectmat terofv ari
ousst udi
es
conductedint
hef i
eldofhumanr esour ces
managementt oprovidethebasi sf ort he
organi
sati
onaldevel
opmentpr ocessandt o
i
mpr ovetheorgani
sationaleffectiveness.
Inahighlycompet i
ti
veglobalizedbusiness
envir
onmentt hemai ndi
fferentiat
orf
or
organizat
ionalsuccessi
si t
shumanr esource.
Or
ganisat
ionscanr
epl
icat
et het
echnol
ogyand
pr
ocessesbutnott
hepeople.
Eachi
ndi
viduali
sdiff
erentt
hatdi
ffer
ent
iat
est
he
humancapit
alofeachorgani
zati
on.
Joi
nCAI
IBWI
THASHOKonYouTube
I
nhi sbookTHELANDMARKSOFTOMORROW,
PeterDrucker(
thef
amousmanagementgur
u)
observes:
“nomat terhowmuchwecanquant i
fy,
thebasic
phenomenaar equalit
ati
v eone's:changeand
i
nnov ations, r
iskandjudgment s, gr
owthanddecay,
dedication,v i
sion,r
ewardsandmot i
vati
on,soon
andsof orth.Thediscipl
ineweneedcannotbea
technicaldiscipli
nethoughi twillhavemany
technicalar eas.I
tmustbeat r
ulyhumani st
ic
disci
pline'.
Practi
ti
onersandmanager shavecomet o
recogniset
hecomplexwor ldi
nwhi chtheymust
operateandhavebecomei ncreasi
nglywill
ingto
accepthelpfr
om behaviour
alscienti
stsin
i
dentifyi
ngandresol
vingorganisati
onalprobl
ems.
Anor ganisat
ionisaplannedcoor di
nati
onofthe
activi
ti
esofanumberofpeopl eforthe
achievementofcommonor ganisati
onalobj
ecti
ves
throughinvol
v ementofpeopletoassigned
functi
onsandt hr
oughahierarchyofauthor
it
yand
Joi
nCAI
IBWI
THASHOKonYouTube
r
esponsi
bil
it
yusi
ngappr
opr
iat
etechnol
ogy
.
Thecharacteri
sti
csofanor gani
sat
ionandi
ts
successarelargel
yinf
luencedbyvari
ous
managerialandorgani
sationalf
act
ors.
Thus,t
hestudyofhumanbehav i
ouratworkcannot
bestudi
edinisol
ati
on,ignor
ingv
ari
ousint
er-
dependentcompl
exit
ies.
I
ndust r
ialwork,
origi
nal
ly,
wasorgani
sedaround
thetechnologyavail
abl
eandrul
esofchecksand
balances.
I
natechnol
ogicall
ydri
venorgani
zat
ion,
mostofthe
r
outi
neworkishandledbymachinesandpeopl
eare
i
nvol
vedinst
rategicf
uncti
ons.
Thus,
thecompetenci
esofempl
oyeespl
ayan
i
mportantr
ole.
Thus,t
heemphasi
soforgani
sat
ionshaveshif
ted
fr
om quant
it
ytoqual
it
yofhumanr esour
ces.
Beingthemostsigni
fi
cantdif
fer
enti
ator
,
organi
sati
onsarereadytopaysigni
fi
cant
compensationf
oracquir
ingtal
entedhuman
Joi
nCAI
IBWI
THASHOKonYouTube
r
esour
ce.
Organisati
onstodayhav ereali
sedthattheyneedto
respondtochangesoccur ri
ngintheenvir
onment;
beittechnology,compet i
ti
vepressur
e,business
dimension,str
ategies,customerexpect
ationsor
theemer gi
ngmar ket
s.
Their(Org.)exper i
encereveal
sthatafterdue
analysi
s,itisrelati
velyeasytothi
nkanddeci de
uponar esponset obusinessortechnology
di
mensi on; but,
t heimplementati
onisof t
enaslow
processoradi f
ficultonetogothrough.
Thisi
sbecauseiti
nvol
vesconvi
nci
ngpeople,
changi
ngthei
rhabi
tsandmindset,
theest
abli
shed
waysofthi
nki
ngandpercepti
on.
Andevent
hebestst
rategycanfai
lifnot
i
mplement
edinther
ightspir
it
.
Thepeoplecomponenti
sthusbecomingthekey
fact
ortosuccessoft
hestrat
egy;bei
tforsur
viv
al
orgrowthorachi
evi
ngexcell
ence.
Joi
nCAI
IBWI
THASHOKonYouTube
Peoplemanagementhasbeenthemosti
ntr
igui
ng
aspectofmanagi
nganorgani
sati
onal
lal
ong.
Theor gani
sat
ionshav erecognisedits(Peopl
e
management )contr
ibuti
oni nthetotalfr
amework
butthi
saspectissody nami cthatitdoesnotseem
toreachalevelofstabil
it
y.
Thet echnol ogy,
thesy st
em andit
ssubsystemsor
theinfrastructur
alresourcest
endtogetstabil
ised
atleastforacer tai
nper i
odinthei
revol
uti
on
process, butpeoplemanagementt endstoremai n
an‘alive'i
ssue.
Oneofthereasonsfort
hisl
iesi
nitsbeingdi
ffer
ent
i
nnaturecomparedtoanyotherr
esourcethe
or
ganisat
iondependsupon.
Theotherresourcesarepassiv
e–i nt
hesensethat
theydonotreactortheirr
eacti
oncanbecontr
oll
ed
orpredi
cted.Buthumanr esourcei
snotso.
Thisresour
ceiscapableofrespondingtot
he
tr
eatmentgiventoitandtheresponseisnot
standardoruni
for
m.
Joi
nCAI
IBWI
THASHOKonYouTube
Ev
enasl
ightv
ari
ati
oncancr
eat
ewav
es.
Ul
ti
matel
y,or
gani
sati
onsexi
stforpr
oduci
ng
pr
oduct
sandservi
cestomeethumanneeds.
Thus,manpoweroccupi
esthecentr
alplace,l
ooked
atfr
om anypoi
ntoranyorgani
sati
onalactiv
ity
.
Organi
sati
onshav eat
tempt
edtodealwit
hpeople-
i
tsempl oy
ees–accordingt
otheunderst
andi
ng
preval
entabouthumanbehavi
ouratanypoi
nti
n
ti
me.
Thevar
iat
ionshavebeenchar
act
eri
sedf r
om a
rat
hermechani
sti
capproacht
oaphilosophi
calone.
Theev ol
uti
onofnewappr oacheshasbeen
tr
igger
edbyr esearchint
hefiel
dofmanagementas
wellassocialsci
ences.
Humanaf f
air
si nanyor gani
sationarei
nfl
uencedby
awidevari
etyofemot ionslikeloveandhate,
humanneedsandexpect ati
ons, humanvalues,
bel
ief
sandper cepti
ons, t
radit
ionsandculture,and
al
sobytechnical,
social,economi c,
demogr aphic
andpoli
ti
calchangesanddev elopments.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er20:Fundament
alofHumanResour
ses
Management(PART-
II
)
Whatwewi
llst
udy
?
*
Whati
sHumanResour
ce?

THEPERSPECTI
VE:
Anappropriatebegi
nni
ngtounderstandthe
fundamentalsofpeopl
emanagementwoul dbet o
appreci
atethefoundat
ionsofanorganisat
ion.
Anor gani
sati
onisprimaril
yar amificati
on
(consequence)ofthefactthattherei san
i
nterdependencyimpli
edi nthesatisfacti
onof
needsofindivi
dualsalongsidewitht he
achievementoforganisati
onalobject i
ves.
Anorgani
sati
oni
scomingt
ogetherofindi
vi
dual
sin
or
dertoatt
ainacommongoal
/purpose.
Joi
nCAI
IBWI
THASHOKonYouTube
Asdef
inedbyEdgarSchei
n,
“Anorganisat
ionistherationalcoor
di nat
ionofthe
acti
vi
tiesofanumberofpeopl eforthe
achi
evementofsomecommonexpl icitpurposeor
goal,
throughdivi
sionoflabourandf unctionand
thr
oughahi erar
chyofaut hori
tyandr esponsibi
li
ty.
'
Suchacomi
ngt
oget
hercanbef
ormalori
nfor
mal
.
Inaformalset up,t
hereisagivengoal,astr
uctur
e,
expli
citr
olesandr el
ationshi
psinorderto
coordi
natet heacti
vit
ieswhereasinaninfor
mal
organi
sation,theseaspectsevol
veasanout come
ofthegrouppr ocess.
Inaformalsetup,t
heacti
vi
ti
es,
processes,r ol
es
andresponsi
bili
ti
esar
edocumentedt omai ntai
n
theunif
ormit
yofapproachandconsistencyin
deci
sionmaking.
Itisessent ial
lyrequi
redwhentheorgani
zati
onhas
gr owni nsizeandshapet hought
oomuch
str uctur
edappr oachsometimescreat
esstruct
ural
rigiditi
esresulti
ngint
oslowdownofdecision
maki ngprocess.
Joi
nCAI
IBWI
THASHOKonYouTube
Drawingfr
om thi
sdefini
ti
onwecanseet hatther
e
aretwoint
erdependentaspect
s,i
.e.
,oneabout
peopleandtheotheraboutact
ivi
ti
es.
Hist
ori
cal
ly
,twost
reamsoft
hought
shav
e
devel
oped:
one,onhowt oorganisetheactiv
iti
esmost
systemat i
callyandanal y
tical
lysothatspeci
fi
cit
yin
thewor kprocessesandoper ati
onscanbebr ought
about,andt heot her,onhowt ounderstandan
i
ndividual'
sr elati
ontoagi venacti
vit
ynow
recognisedas' work'
.
Obv i
ousl
y,enoughthinki
nghasdev el
opedinbot
h
thesespher esovertheyearsandthetwo
per spect
iveshaveaffect
edeachot herduet
othe
highdegr eeofthei
rassociati
onand
i
nt erdependence.
Thebeginni
ngoft
hesetwoperspect
ivescanbe
seeninthewor
kofRobertOwenandChar l
es
Babbage.
Joi
nCAI
IBWI
THASHOKonYouTube
RobertOwen,amanagerbyprofessi
on,cl
aimed
thatamanager'
sbesti
nvestmentwasinhis
workers(
'vi
talmachi
nes'ashecall
edthem).
Hebeli
evedinpr
ovidi
ngbett
ercondi
ti
onsfor
worker
swhichhethoughtwoul
dresul
tinhi
gher
pr
oducti
vit
y.
WhereasChar
lesBabbage,apr
ofessorof
mathemati
cs,
wasanear l
yadvocateofdi
visi
onof
l
abour.
Hebel i
evedinapply
ingsci
enti
fi
cprinci
plestowor
k
processestoincr
easeproduct
ivi
tyandreduce
expenses.
Whichevermaybet hef
ocalpoi
nt,cooper
ati
onof
i
ndivi
dualstocoordi
nat
etheacti
viti
esinan
or
ganisati
onisthebegi
nningofpeople
management .
Organi
sat
ionshav
eattemptedtoexpl
oret
hebest
wayofachiev
ingt
hisandconti
nuetodoso.
Thegenesi
sofpeopl
emanagementl
iesint
he
evol
uti
onofmanagementt
hought
sit
self
.
Joi
nCAI
IBWI
THASHOKonYouTube
Therefor
e,i
nordertotr
acethedevel
opmentof
peoplemanagementasaf unct
ion,
wehaveto
studythevar
ioustheor
iesofmanagement
.
Duri
ngtheflur
ryoftheindust
rialr
evol
uti
on,t
he
vi
ewoft hecoordi
nati
onofact i
vit
iest
akenby
or
ganisati
onswasv er
ysimplisti
c.
Itf
ocusedontheacti
vi
ti
esthatr
elat
edt
othewor
k
sit
uat
ional
one,i
.e.doi
ngthework.
Itwasassumedthatpeoplewoul
ddot
hewor
kthey
havebeenemployedfor(pai
dfor
).
Thiswasal sosupport
edandsubsequent l
y
highl
ightedbythe'sci
enti
fi
cmanagement
approach'conceptual
isedandpioneer edby
Frederi
ckTay l
orfamousforhis‘di
v i
sionoflabour
'
conceptand‘ t
imeandmot ion’st
udiesandf urt
her
substantiat
edbyGanttandGi l
berths.
Someofthemaj
orassumpt
ionsi
nthi
sappr
oach
coul
dbesummari
sedas:
1-Thetaskscanbebr
okendowntosi
mpl
euni
tsf
or
peopl
etounderst
andandper
for
m.
Joi
nCAI
IBWI
THASHOKonYouTube
2-Peopl
ewi
lldoagi
venact
ivi
tyi
nret
urnf
ormoney
.
3-Peoplewil
lhav
etodowhati
sdefinedbyt
he
organi
sati
onandint
urnbyt
echnol
ogy .
Thesimpli
cit
yoft hisappr
oachi
gnoredmany
i
mpor t
antandv it
alaspect
sofhumanbehavi
our
whichwerelaterbroughtt
othefor
efront
.
Fir
stofall
,itconcent
rat
edonl yontheactiv
iti
es
i
mpl i
edinthewor kbutcertai
notheracti
vi
ties
(behavi
our)whichtakeplaceasanat ur
aloutcome
werenotconsidered.
Forinst ance,fati
gue,boredom, t
heneedt o
conver sewi t
hot hers(notrelat
edt owor k),
the
rel
ationshipst hatmaygr owoutoft heinteract
ions,
thegr oupbehav ior/dynami cs,etc.
,werenot
perceivedasr elevantformanagi ngPeopleand
work.
Theperspecti
vecontr
oll
edandpr edict
edthe
acti
vi
ti
esofpeoplestri
ctl
yrel
atedtowor kandi
t
choosetoletgooftheotheraspects.
Joi
nCAI
IBWI
THASHOKonYouTube
Theprimaryassumpti
onwasthatpeoplecanbe
repl
aceabl
eandwi l
lnotmakesi
gnif
icanti
mpacton
theorgani
zati
on.
Itwasthissi
mplist
icmechanicalappr
oachthat
pri
mar i
lywasresponsibl
efortheri
seofl
abour
unionsandlabourunrest
.
Thoughcer t
ainfactorsli
keperiodiceconomi c
depression,immi grat
ionofwor kers,aggressive
stanceoft hemanagementi ncombat ingtheef fort
s
oflabourtouni onise,del
ayedst r
engtheningoft he
coll
ectivebargainingasapr ocess,thegenui neness
ofissuesmadei taper manentformalf actorof
organisati
ons.
Theconceptofunionism al
soforthef
irstt
ime
madet heorgani
sati
onsawar eofther
oleof
ext
ernalsocio-
pol
it
icalpr
essures.
Theseperspecti
ves,assumpt i
onsandappr oaches
havenowl i
tt
lerel
evancewi thtoday'
sorganisati
ons
whichareoperati
nginVUCA( Volat
il
it
y,Uncertai
nty
,
Complexit
yandAmbi gui
ty)envir
onment.
Joi
nCAI
IBWI
THASHOKonYouTube
I
naddit
iontot hi
s,cer
tai
ndev
elopmentsi
nthe
i
nter
nalenv
ironmentoftheorgani
sat
iongav
erise
t
oaf ewnewi ssues.
Forinst
ance,thetightl
ystr
ucturedandplanned
worksystemscoul dnotinsti
llmeani
ng/pri
deinthe
workthatindiv
idualsdidandt hi
shadanadv er
se
eff
ectonpr oducti
vit
y.
Thi
swast hebegi
nni
ngoft
heawarenessaboutt
he
cr
ucialr
olepl
ayedbyemot
ionsi
nworksit
uati
ons.
Thisreali
sat
ionl
edtotheent
ir
espectr
um of
researchint
heareaofworkmoti
vat
ion.
Theimpactof'Hawthor
neStudies'carr
iedoutby
El
tonMayoandot hersatWesternElectri
c
Companyduring1924–33,i
sal andmar kint
he
evol
uti
onofthemanagementt houghtandhuman
appr
oachinmanagement .
Thesestudi
espointedouttovari
ousdimensionsof
humanbehav i
ourthatwerenotconsi
deredtobeof
anysigni
fi
canceintherest
ri
ctedappr
oachtaken
earl
ier
.
Joi
nCAI
IBWI
THASHOKonYouTube

Thehumanr el
ationsmov ementt
hatf
oll
owed
repl
acedthe‘r
ational
-economi
cman'bythe‘
soci
al
man’ per
spect
ive.
I
tfocusedont heroleplay
edbythev ar
ious
rel
ati
onshipsthatdevel
opatwor kasanoutcome
oftheorganisat
ionali
nter
act
ions.
Foll
owi ngt
herevel
ations,t
hepeoplemanagement
systemswer egearedtotakecareofthe
rel
ationshi
pswithsupervi
sors,
coll
eaguesand
groups.
Joi
nCAI
IBWI
THASHOKonYouTube
Laterresear
chersli
keChrisArgyri
s,Abraham
Masl ow,DouglasMcGregorandFr edri
ckHerzber
g
highli
ghteddimensi
onsofmot iv
ationthatare
rootedinthegrowthneedofani ndivi
dual.
Thecentralt
hemeofthei
rar
gumentswast
hat
i
ndivi
dualsaremot
ivat
edbyothert
hanmonet
ary
fact
orstoo.
Theyemphasisedthatindi v
idual
sliketoper
cei
ve
meaningint
heactivit
iest heydo,theyl
iketo
experi
enceasenseofr esponsibil
itywhil
e
perf
ormingatask,
andhav easenseof
achiev
ementwhent het askiscompl et
e.
I
fsomeoftheseelement
sar
emissi
nginthe'
wor
k'
t
heydo,
theperfor
mancecanbel
imi
ted.
I
notherwor
ds,t
heyneedt
ofeelpr
oudaboutwhat
t
heyaredoi
ng.
Theiri
nvol
vementi
nthepr ocessofdeci
dingt
hei
r
act
ivit
iesmaydet
erminetheleveloft
hei
r
perf
ormanceandsati
sfacti
on.
Joi
nCAI
IBWI
THASHOKonYouTube
Therefor
e,t
heperspect
iveofpeopl
emanagement
shouldprov
idef
orthesecomponents.
Thi
swasthebeginningofthepresent
dev
elopment
alapproachtowardspeople
management
.
Thus,thepeopleandpeopl
emanagement
functi
onsassumesgreatsi
gni
fi
cancei
nthe
organisat
ions.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er20:Fundament
alsofHumanResour
ses
Management(PART-
II
I)
Whatwewi
llst
udy
?
*
Whati
sPeopl
eManagement
?
TheDev el
opmentofPeopl
eManagement
Funct
ions:
Thehi storyofmanagementofpeopl
easadisti
nct
manager i
alfuncti
ongoesbackt
otheendofthe
nineteenthandt hebegi
nni
ngofthet
wenti
eth
century.
Wi t
hasi gnif
icantincreasei
nt henumberandsi ze
ofor ganisat
ionalunit
sasasequelt otheIndustri
al
Rev oluti
on,t
herewasaneedt ohav especi
al
depar tmentsli
kef i
nance,accounti
ng,pr
oduction,
etc.
However,i
twasmuchlat
erthatt
heneedf ora
depar
tmenttomanagepeoplei
ntheorganisat
ions
wasfelt
.
Joi
nCAI
IBWI
THASHOKonYouTube
InIndi
atheexperi
mentongroupbehavi
ouri
n
Ahmedabadmi l
lsbyProf
.A.K.Ricei
n1952isa
signi
fi
cantcont
ri
buti
oninthi
sdir
ecti
on.
Feworganisat
ionshadapostofwel
far
esecr
etar
y
tomeettheneedsoftheworker
sandprev
ent
worker
sfrom formi
nguni
ons.
Thesesocialsecr
et ar
ies,
ast heywerecal l
ed,
markedthebirthofspeciali
sedhumanr esour
ce
managementasdi sti
nctfr
om theday -
to-day
super
visi
onofper sonnelbyoper at
ingmanager s.
Theuni
tsdeal
ingwithsuchactiv
iti
esweremostl
y
ter
medasTimeOf fi
ceintext
il
emi l
lsandfact
ori
es
andasest
abli
shmentsectioninbanksand
commerci
aloffi
ces.
Theywer e,i
nfact,engagedalmostenti
rel
yin
promotingtheorganisati
onalmai
ntenance
object
ive,al
thoughthiswasnotwidelyrecogni
sed
(Miner
,1969).
Perhapsitwasint
hechemi calandphar
maceuti
cal
i
ndustri
es,thet
erm per
sonneloffi
cerwasi
nit
ial
ly
usedin1960s.
Joi
nCAI
IBWI
THASHOKonYouTube
Alt
hought
hefundamentalact
ivi
ti
esi
nvol
vedi
n
peopl
emanagement,
viz.,
(
i)Recrui
tmentandsel
ect
ion(
howdowesel
ect
t
herightper
son?)
(i
i)Tr
aininganddev
elopi
ng(
howdowebui
ld
capabi
lit
ies?
)
(
ii
)Perf
ormanceappr
aisal(howdowemeasur
e
r
esul
tsandachi
evements?)and
(i
v)Rewardandcompensati
on(howdowe
compensateemploy
eesforcont
ri
but
ion?
)
Ot
hersi
gni
fi
cantHRM f
unct
ionsv
iz.
(i
)Manpowerassessment(howdowei dent
if
ythe
t
ype&numberofempl oy
eesrequi
red?
)
(i
i)Careermanagement(
howdowepl
ant
he
growthofemployees?
,
(i
ii
)Successi
onplanning(howdowei dent
ifyand
devel
opleaderst
or eplacekeyf
unct
ionari
es?)and
(i
ii
)Tal
entmanagement(howdoweident
ifyt
alent
andnurt
uret
hem? )emer
gedaskeydif
fer
enti
ators.
Joi
nCAI
IBWI
THASHOKonYouTube
AsFr
edLut
hansobser
ves
‘
Theseexamplesoff
erampleev
idencet
hatthe
per
sonnelf
uncti
onwasverymuchinexi
stence
bef
orethe1930s.
Howev er
,themajorchangeinthepract
iceof
managementt hati
ncludedtheper
sonnelfunct
ion,
withi
tsaccompany i
ngconcernforthehuman
element,
didnotoccuruntilt
hesoci
o-psychol
ogical
turmoi
linthel
ate1920sandear l
y1930s’.
I
ngeneral,
itappear
st hatt
herehavebeentwo
maj
ortradi
tionsortr
endswi t
hinper
sonnel
managementov ert
hey ear
s.
Oneoft hese,stemmi nglargelyfrom economics
andaccount i
ng, emphasisedahar dheaded,pr
ofit
-
mindedappr oacht otheutil
isati
onofhuman
resources;t
heot her,wit
hitsor i
ginsinsocialwork
andcer t
ainsubf i
eldswithi
nsoci alpsychology
,took
mor eofasoci alwelfar
ev i
ewpoi nt.
Thisdual
it
yofappr
oachappearstohavehampered
thedevel
opmentoftheprof
essi
onwithi
ncert
ain
segmentsoft
heAmer icani
ndust
ry,
andthesigns
Joi
nCAI
IBWI
THASHOKonYouTube
oft
hespl
ithav
est
il
lnotent
ir
elydi
sappear
ed.
Thesocialwelf
aretradi
ti
onhasbeenv i
ewedas
anti
thet
ical(
opposing)tother ealor
ganisat
ional
goalofproducti
vi
tybymanymanager s,bot
hwi t
hin
andoutsidethepersonnelfi
eld.
Ont heotherhand,t
hef eel
ingamongt hosewitha
socialwelf
areori
entati
onhasbeent hat
managementgener all
ypaidmor eemphasi sto
producti
vit
yandprofitandlesstoempl oyee
sati
sfacti
on.
Onlyinrel
ati
velyrecentyearstherehasbeensome
l
esseningofthisconfli
ctasani ncreasingnumber
offi
rmshav ecomet oacceptthev i
ewt hatther
e
arereal
lytwoprimarytypesofor ganisati
onalgoal
s
–producti
v i
tyandmai ntenance.
Bothappeartobeessent
ial
,yetsomepol
ici
esand
procedur
eswhichmaximiseonemaywelldosoat
theexpenseoftheot
her(Miner,
1969)
.
Ithasnowwi delyr
ecogni
sedt hattheorgani
sat
ions
cannotignoretheemployeesatisf
acti
onaspectfor
i
t ssust
ainabi
li
tyandgrowth.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er20:FundamentalofHumanResour
ses
Management(PART-I
V)
Whatwewi
llst
udy
?
*
Whati
sHRM?
*
Whati
sHRD?
Li
neandSt
affOr
gani
zat
ion:
I
nacentral
izedstructure,
decisionsar
emadeby
themanagersandt hedecisi
onsar efl
own
downwardthrought heenter
prise.
Howev er
,asanorganizati
ongrowsinscope,
complexi
tyincr
eases,theyneedtobefl
exibl
ewi
th
thecontr
olascentral
lyappli
ed.
Linegroupsareengagedi ntasksthatfocusont he
techni
calcoreofthefi
rm.Theyar ei nv
olvedin
achievi
ngthepri
mar yobjecti
veoft heenterpr
ise.
Linegroupshavethefinaldecisi
on-making
authori
tyinr
elat
iontothet echni
calorganizat
ional
purposes.
Joi
nCAI
IBWI
THASHOKonYouTube
Staffgroupsar ei ntaskst hatpr ov i
desuppor ttothe
l
inegr oups.Thei rwor kisliket hatofadv isory
(l
egal),servi
ce( humanr esour ce) ,orcontrol(the
account i
ng)groups.St affgroupssuppor tthose
whoar eengagedi nthecent ralpr oductiveact i
vit
y
oftheent erpri
se.Theybackupt heirwork.St aff
groupshel ptheor ganisati
oni nanal ysing,
researching,counsel l
ing,moni tori
ng, andin
evaluati
ngact i
vities.

RELATI
ONSHIPBETWEENHRM &HRDANDTHEI
R
STRUCTUREANDFUNCTIONS:
Asitcanbeobser v
ed,t
hechangi
ngperspecti
veof
HRM wast ri
gger
edbygreat
erandwider
underst
andingofhumanbehavi
ouri
nrelati
ontothe
for
malor gani
sat
ion.
Therefore,t
heevolut
ionofappr
oachesis
characteri
sedbytheaddit
ionofthedi
mensi
ons
rat
hert hansubst
it
uti
on.
Joi
nCAI
IBWI
THASHOKonYouTube
Inthi
sframeworkofchange,
theHRM asafuncti
on
i
nanor gani
sat
ionmaturedtoencompasst
he
newerdimensi
onsanddeeperaspect
sofgiven
dimensi
ons.
I
not herwor
ds,noneoft
heearl
ieraspect
sof
peoplemanagementwereent
ir
elywipedout
.
Theyhavebecomestabi
li
sed,r
out
ini
sedand
ther
efor
ebecomelesscruci
ali
ncompari
sontot
he
newerdimensi
ons.
Thepr
esentper
spect
iveofHRM,
toquot
eShet
h:
‘
HRM assumest hatthemanagementofpeopleis
anint
egralpartoft heresourcemanagementt
ask
wit
hinanenterpriseforachievementof
or
ganisati
onalobj ect
ives.
Humanbei ngsdevel
opast akeintheenterpr
iseas
theyworkinitandhencetheirmoti
vati
on,
developmentandgrowthconstit
uteacrit
icalfactor
i
nt hedevel
opmentandgrowt hoftheorganisation.
Acrucialmanager
ialr
esponsi
bil
it
yistomakea
cont
inuingeff
ortt
oharmonisetheint
erestand
Joi
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gr
owthoftheor
ganisat
ionwi
tht
hoseoft
he
empl
oyeesatal
llev
els.
Humansensi
tiv
ity
,t r
ustinpeopleandpart
ici
pati
ve
managementaretreatedasapar tofmanageri
al
cul
tur
eandphil
osophy '(Shet
h,1992).
Asimpl
ici
tintheabovequot
ati
on,HRM servesas
anumbrel
laforal
lpeopl
e'smanagementfuncti
ons
-ol
dandnew.
Itprovi
desaguidingpr
inci
plefordevelopi
ngnew
peoplerel
atedsystemsandalsoprovidesa
standardtoeval
uateanyexist
ingsubsy st
emsint
he
areaofpeoplemanagement .
I
naddit
ion,i
temphasisest
hatmanagi
ngpeopl
eis
ali
ne-
and-st
afff
unct
ionboth.
Everymanagerhastoi
mplement/pr
acti
cea
componentofthi
sfunct
iont
hroughhisday
-to-
day
acti
ons.
I
notherwor
ds,
ever
ysy
stem hasapr
ocess
r
equi
rement
.
Joi
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Prepar
ingthelinemanagertoappr
eci
ateasy st
em,
i
tsrati
onal
eandt hel
inkaget
otheHRphilosophy,
formsacrucialcomponentoftheHRfuncti
onary
today.
Changi
ngNomencl
atur
eofHRM:
Theprocessofadopti
ngthechangi ngperspecti
ve
ofHRM byanyorganisat
ionisevidentinthe
changi
ngnomenclatureofthefunction/
department.
Thus,atthefi
rststaget
he‘LabourandWelf
are
departmentbeingsubsti
tut
edorrenamedas
'
Personneldepartmentandinthenextst
age
broughtunderoneHRf uncti
onary
.
Acar ef
ullookr
eveal
sthatt
hetradi
ti
onalact
ivi
ti
es
sti
llconti
nueassub-
modulesofthebroadHRM
functi
on.
Expertshaveputtheseei theri
nthef ourtr
adi
ti
onal
sub-modulesofAcqui sit
ion,Development,
Mot i
vati
onandMai nt enance( De’Cenzo)or
PlanningandAdmi nist r
ation,HRD, JobandSalar
y,
andWor kersAff
airs.( PareekandRao)
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Thedi
ff
erencesher
ear
ethoseofcl
assi
fyi
ng.
Butbyandl ar
geitcanbeobservedt
hatthe
conventi
onalcomponentofpeoplemanagementi
s
categori
sedunder(Per
sonnel
)Administ
rat
ionand
Maintenance.
Thesy st
emsr el
atedt oacquisi
ti
on,promotion,
administ
ration,salaryandlong-t
erm benefi
tsare
underadmi nistr
ati
onandt hetr
aditi
onall
abour
management ,gri
ev anceanddiscipl
ine
managementact iviti
esarecoveredunderthe
maintenancesy stems.
Thedev elopment alsyst
emssuchasi nduct
ionand
social
isati
onoft heindivi
dual
s,devel
opmentand
growth,per f
ormanceappr ai
salandcounsel
ling,
careerplanningar ecover
edunderthe
nomencl atureofHumanResour ceDevel
opment
(HRD).
Anot
herclassi
fi
cati
onv i
ewstwosubsyst
emsunder
HRM,vi
z.administr
ati
ve,dev
elopment
aland
pr
event
ive(Mankidy).
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Organisati
onsincreasinglycompet ewitheach
otheronthebasi sofef f
ecti
v epeoplemanagement
anddev el
opmentbyt appingintotheideasof
workersandor ganisi
ngt heirworkinmor eeffect
ive
mannerandev enbyf oll
owingt hebestpract
icesof
otherorganisat
ions.
Thiscanbepossi blei
ftheorganisat
ionsprocure
ri
ghttypeofpeopl ewit
hrightt
y peofskil
lsand
att
itudeforri
ghtjobswhocanbedev elopedto
meett hepresentaswellasfutureneedsof
manpowerr equirements.
Besidest het
radi
ti
onalroleofmai
ntenanceand
managementofmanpower ,t
heHRM hastoplaya
cruci
alroleinhumanr esour
cedevel
opment,
appraisalanduti
li
sat
ion.
Thus,HRDissomet i
mesconsi
der
edasmost
si
gnif
icantsubsy
stem ofHRM.
Widerangeofact
ivi
ti
esar
eincl
udedwi
thi
nthe
boundari
esofHRM.
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Ther ootsofpeopl
emanagementanddev el
opment
resideinthewelf
aretradi
ti
onwithfocuson
i
mpr ov
ingorgani
sati
onaleff
ici
encyand
effecti
veness.
I
tshouldalsoemphasisetheneedforcont
inuous
pr
ofessionaldevel
opment(CPD)tomeetthe
or
ganisati
onalrequi
rements.
Thedev el
opmentofprof
essi
onalsshoul
dbe
cont
inuousbecausether
eisalwaysscopef
or
i
mprov ementofski
ll
sandperfor
mance.
Theindi
vidual
s,however,hav
etoownandmanage
thei
rdevelopment
alneeds.
Thedevelopmentpr ocessshouldhav ecl
ear
l
earni
ngobj ect
ivesthataimt osati
sfyboth
i
ndivi
dualandor ganisat
ionalneeds.
Thereisnoconfl
ictbet
weenthest
ruct
ureand
funct
ionsofHRM andHRD, t
hedif
fer
enceisonl
yin
theapproachandemphasis.
Joi
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Whileroutinefunctionsbecomeapar tofHRM, t
he
HRDf unctionsemphasi seonor ganisati
onal
i
nterventi
onsf orclimatedev elopment ,
empl oyee
andor ganisat
ionaldev elopmentlinkedwi th
organisati
onalgoal s/objectiv
esandchange
managementpr ocesswi ththeemphasi sof
enhancinghumancapi taltopresentandf utur
e
needsoft heor ganisat
ion.
Itmayinvolv
esomeel ementofconductingsur
vey
s
andresearchtoseekemployees'
feedbackand
opini
on,thei
raspir
ati
ons,
andsuggest i
onsto
handlethepresentor
gani
sati
onalissues.
I
tmayalsoi
nvol
vesomeelementofi
nnov
ati
onst
o
f
ormul
atepeopl
erel
atedpol
ici
es.
Thus, t
heemphasisofHRDi sonover
all
organisat
ionaldev
elopmentpr
ocesswit
hfocuson
developmentofpeople.
Joi
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ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(PART-
I)
Whatwewi
llst
udy
?
*
Whati
sHRDandI
tssubsy
stems?
I
NTRODUCTI
ON:
Theper spect
iveofmanagi
ngpeopleint
he
organisati
onoveraperi
odoftimehasbeen
mat ur
ingtoincludet
hetot
ali
tyofhumanbei
ngs.
Assuch,i
tnowencompassesal
laspect
sofdeal
i
ng
wit
hpeopleandi
stodayter
medasHuman
Resour
ceManagement(HRM).
Origi
nat
ingasameresetofacti
vi
ti
es,HRM t
oday
hasacquir
edthest
atusofacruci
alf
uncti
onint
he
organi
sati
on.
Thishashappenedasar esultofthereali
sation
thatpeoplecannotbet r
eatedasj ustanotherfactor
ofproducti
onbutar eanimpor tantassetin
determini
ngtheov er
allsuccessoft heorganisati
on.
Joi
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Resear
chersandpract
ici
ngmanager
shav
et r
iedt
o
evol
vestr
ategi
estoanswert
hehumanrel
ated
i
ssues.
Theycertai
nlyhav
eacceptedtheli
nkagebetween
theindi
vi
dual'
ssati
sfact
ionandtheorgani
sati
on'
s
growth.
Ti
meandagainsy
stemshav
ebeendev
elopedt
o
at
tai
nthi
scompati
bil
it
y.
Int
hiscont
ext,
newsy st
emshav ebeendev
eloped
andafewtradi
ti
onaloneshav ebeenmodif
iedto
sui
ttheemergi
ngorganizat
ionalneeds.
HRDANDI
TSSUBSYSTEMS:
Theindustr
ialr
evolut
ionwit
hitsemphasison
quanti
tyoutputandthepreval
entunder
standingof
howpeoplecouldbemadet oproducemore( wor
k),
hadledtothede-humanisat
ionoftheworkplace.
Peoplewer evi
ewedasmer esubsti
tutesfor
machines,andtheimport
antcomponent sof
humanbei ngs,vi
z.,
emoti
ons,needs,aspi
rati
ons,
expectat
ions,v
alues,f
eel
ings,
etc.
,hadnopl ace.
Joi
nCAI
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Thisreal
isat
ionhadgivenwayt ov ari
ousopti
onal
humanf ocusedstr
ategies.Pri
mar i
ly,
theywere
rel
atedtomot i
vat
ionint hecontextofwork.
Inotherwords,eff
ort
swer edirect
edt omakethe
workmor einter
esti
ng,v
aluable,andmeani ngf
ult
o
peoplesothattheywereinvolvedindoingthe
acti
vit
iesbeyondamechani calperspecti
ve.
Forthis,
oneappr oachwast orecogni set
he
emotions, f
eeli
ngsandneedsofhumanbei ngs,and
theotherwast ochanget he‘
cont ent’oft
heactivi
ty
sothattheact i
vit
iessati
sfyt
hepsy chosocial
needsofi ndiv
idualsandmotivatethem toperform
bett
erwi t
houtanyext er
nalpressure.
Boththeaspect s,
i.e.t
hefeel
ingsandt hejob
content,ar
einterl
inkedandtheref
ore,organi
sat
ions
somet i
mest i
nkeredwi t
hthejobcontentand
somet i
mespai dat t
enti
ontohumanf eeli
ngsand
needs.
Theseapproacheshadroot
sintheearl
iert
heori
es
whicheit
herfocusedonhowthejobsshouldbe
organi
sedorhowt omakepeopledowhatt heyl
i
ke
Joi
nCAI
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t
odo.
Atthisjunctur
e,iti
spertinenttounderst
andt
he
l
inkageofi ndi
vidualdevelopmentand
organisati
onaldevelopment /
growth.
Everyorganisat
ionsetscer
tai
ngoalstowar
ds
whichtheirenti
reeff
ortsar
edirect
ed.
Thegoalmaybei nter
msofpr oducti
vit
y ,bet
ter
workcultur
e,withtheult
imateobject
ivesof
sati
sfyi
ngbusinessgoals,needssatisfacti
onof
peopleandaddingv al
uefori
tsstakeholdersaswel
l
asthesocietyatlar
ge.
Toachievethesegoals,t
heorganisati
onshave
syst
emsf orproducti
on,f
inance,sal
e,contr
oland
monitor
ingandt hepeopl
eempl oyedfiti
ntheenti
re
gamutofsy st
emst oproducewhati si
ntended.
Theorgani sati
onhasast ructur
e,apatt
ernto
managet heent ir
eprocess.Thesuccessofthe
organi
sationdependsonef fect
iveper
formanceof
theseunit
s/ lev
elswhichinturnistheperfor
mance
ofpeopleoccupy ingvari
ousr ol
esinthe
organi
sationalstruct
ure.
Joi
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Thusthestr
uct
urecanbeviewedasthe
edi
fi
ce(bhav
an)aroundwhi
chprocessesar
ebui
l
t.
Eachunit(jobr ole)ofthisedif
icer
equir
escer
tai
n
knowledge, skil
lsandat ti
tudeinanindi
vi
dual
,
withoutwhicht hei ndi
vidualmaynotbeablet
ogive
theexpectedl evelofper f
ormance.
Therefore,t
omakesur ethatt heor ganisat
ional
goalsareachieved,itisnecessar yt oensur e
performanceofi ndi
vidualsatal llev el
sinthe
organisati
onandt hattheindiv i
dual shav ethe
requir
edknowl edge,skil
ls,t
emper amentand
atti
tuderequir
edt operformt hej oboract i
vit
ies
successfull
y.
Therecanbevari
ousmeansbywhi
cht
hiscanbe
examinedandachi
eved.
Forinstance,whethert
heindivi
dualshavethe
requir
edknowl edgeorskil
lscouldbecheckedpr
ior
toputti
ngt hem onthetasksorevenbefore
recrui
ti
ngt hem.
Whenthejobschange(technol
ogychange)
,anew
setofi
ndi
vidual
swithnewski l
lscoul
dberecr
uit
ed
Joi
nCAI
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ort
heexi
sti
ngonecoul
dber
etr
ained.
Therewoul dbeanot herscenar
iowhereindiv
iduals
mayber equi
redtobeshi ft
edtoanotherjob,i
n
whichcaseonehast osear chf
orajobthatneeds
theskil
lstheindi
vidualpossessesortheindi
vidual
i
st r
ained.
Inotherwords, t
heassessmentofempl oyeesin
rel
ationtothecompet enciesrequir
edforspecifi
c
j
obsorsetofj obsrequir
edtobeper for
medby
them becomesessent ial
,theassumpt i
onthat
anyonecanper f
orm anyjobhasbeendi scardedas
thejobsarebecomi ngmor ecompl exandr equi
ri
ng
special
izedhigherordercompet enci
es.
ThePerformance/Potent
ialappr
aisalther
efor
eis
anessentialcomponentandthetrai
ningcanplay
animportantrol
einensuringper
formance.
Pri
mar i
lytherearetwoway st
heor ganisati
oncan
ensurethatpeoplehavetherequi
redski l
ls,i
.e.
,
ei
therupgr adetheski
ll
softheexisti
ngpeopl eor
getnewpeopl ewi t
htherequi
redskill
s.
Joi
nCAI
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Dev
elopmentofHRM:
Sever
alsi
gnif
icantchangescamet
hroughi
nthe
1970sand1980sandHRDwentbey ondmere
tr
aini
ngacti
vi
ty.
I
nthe1990s,t
her
ewasacont
inuedsur
gef
or
i
ndust
ri
aldemocr
acy
.
Workersdemandedal arger
,moreautonomousrole
i
ndecision-maki
ng,marketsel
ect
ion,product
i
denti
fi
cation,wor
kplanningandevensupervi
sor
sel
ecti
on.
Asar esultofthesemanager sneededcont i
nual
trai
ningi nparti
cipati
veleader
ship,confl
ict
resolution,i
nterpersonalcommunicationandtask
forcemanagement .
The1990sfocusedonmassiv
ecomputeri
zationof
workpl
acemai nlyt
oimpr
oveoper
ati
onaleff
iciency
andcostr
eduction.
ThePCr evol
uti
onduringtheperi
odchangedt ot
all
y
theworkprocessesandrequir
edcomput erl
it
eracy
atal
loperati
nglevel
swithoutanylossofti
me.
Joi
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Thishasputal
otofpr
essur
eont
het
rai
ning
system.
Thesenior
swhocouldnotpickupthecomputer
ski
ll
sstart
edfeel
ingpower
lessanddevel
opedfear
andanxiet
y.
Thi
speriodalsosawamassiveout
sourcing
i
nit
iat
ivebytheorgani
sat
ionst
ocurt
ailcosts.
Thetwentyfi
rstcent
urysawext ensi
vecompet i
ti
on
duetoli
beral
isat
ion,pr
ivat
isat
ionandglobal
isati
on
ofI
ndianeconomy .
Theorganisat
ionsmainlyfocusedoni mprovi
ng
customerservicebymeeti
ngcust omers'
expectati
onsthroughcust
omi sati
onofproducts
andser v
icesi
nahi ghl
ycompet it
iveenvi
ronment.
Thecustomersar
enowdict
atingthei
rter
msas
theyhavewi
derchoi
ceandtheirbr
andloyal
ti
esar
e
dimini
shi
ng.
Theuseofdataforanal
yti
calanddecisi
onmaking
purposeisal
sogett
ingmoment um i
nmostofthe
progressi
veor
gani
sati
ons.(Resti
nnextpar
t)
Joi
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ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(PART-
II
)
Whatwewi
llst
udy
?
*
Whati
sHRDandI
tssubsy
stems?
Thet r
aditionalI
ndi anbanksbothpubli
csectorand
oldprivatesectorf acedchal
lengesint
heform of
compet it
ivepressur esandchangingcust
omer
demandsf rom foreignbanksandnewpr i
vat
e
sectorbankswhi choperateinhighl
ysophi
sticat
ed
technologicall
ydr i
venenvir
onment .
Mostofthepubli
csectorandoldpr i
vat
esector
bankshadthei
rexist
encef ormorethanacentur
y
wit
hanumberofl egacyissuestotackl
e.
Whi l
ethenewpr ivatesectorbankscoul dadoptthe
bestpracti
ces,organisati
onalcultureandcould
i
mpl ementlatesttechnologyintheiroperati
ons,
the
forei
gnbanksacqui redthepr act
icesand
technologyakintotheirhostcount r
ieswithi
nthe
regulat
oryframewor kofIndia.
Joi
nCAI
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Facedwi t
ht het hr
eatofcompet iti
onf r
om t he
forei
gnandnewpr i
v atesectorbankst hebanks
empl oyedanumberofmeasur eslikegoi ngforful
ly
automat edsy stems( CoreBanki ngSolut i
onbased
operations)pr ecededwi thbusinesspr ocess
reengineering( BPR), of
feri
ngVRSt oi t
sempl oyees,
trai
ningandr etrai
ningofst aff
,lateralrecrui
tment
ofspeci al
ists.
Someoft hesebankshaveundergoner estr
uctur
ing
exerci
sewiththei
nvolv
ementofi nternat
ional
consult
ingagenci
estoadoptbestpr acti
cesand
removebottl
enecksinthei
roper
at i
ons.
ThesechangesneededwellthoughtofHRpoli
cies
toatt
unetheexi
sti
ngstafftoadapttothechanges
andtotr
ainthem t
olear
nnewski ll
s.
HRM isnowbei ngcalledupont obecomea
strat
egicpartnertomakei tsef f
ortsmor eef
fect
ive
andper for
mance- ori
entedinlinewi t
hthe
organisati
onsgoal sandst r
ategies.Thus,st
rat
egic
HRM isgai ni
ngi t
ssignifi
cance.
Joi
nCAI
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Simil
arly
,theemployeesneedglobalori
ent
ati
on
andmi ndsett
odealwi t
hglobalbusi
nesspart
ners,
cl
ient
sandst akehol
dersandtoadoptbestglobal
pract
icestomot i
vat
eandr et
aintal
ented
employees.
Thus,gl
obalHRM i
sgai
ningi
tsgrounds,nowt
hisi
s
cover
edinthecur
ri
cul
um ofB-school
s.
Whilei
mpar t
ingnewt echnologybasedtrai
ning,
the
organi
sat
ionshav etofocusondev elopmentof
behavi
ouralandinter
-personalski
ll
s.
HRDt odayisaprocessbywhi
chtheemployeesof
anorganisat
ionarehel
pedinacont
inuousand
pl
annedwayt o:
(i
)Acquireorsharpencapabi
li
ti
esrequi
redt
o
perfor
mv ari
ousfuncti
onsassociat
edwitht
hei
r
presentorexpect
edfuturej
obs.
(i
i)Dev el
optheirgeneralcapabili
ti
esasindi
vidual
s
anddi scoverandexploittheirowninnerpot
ential
fortheirownandor ganisationaldevel
opment
purposeand
Joi
nCAI
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(i
ii
)Dev elopanorganisationalcultureinwhich
supervi
sor -
subordinaterelat
ionships, t
eamwork
andcollaborati
onamongsubuni tsar estr
ongand
contri
but etot
hepr ofessionalwell-being,
mot i
vationandpr i
deofempl oyees( Raoand
Pereir
a).
Thisdefinit
ionhighli
ghtsthatHRDi snotonlya
tr
aini
ngf oroperationalskil
lsbutal
soincl
udes
behavi
our alski
ll
sasi tulti
matelyai
mst ocreat
ean
enabl
ingcul tur
ewher einthecapabil
it
iesare
'
acquired,sharpened,nurturedandused'.
I
nthiscont
extthespeci
fi
cgoalsofHRD(as
poi
ntedoutbyRaoandPer ei
ra)ar
etodev
elop:
*
Capabi
li
ti
esofeachempl
oyeeasani
ndi
vi
dual
;
*Capabil
it
iesofeachi
ndi
vi
duali
nrel
ati
ont
ohi
sor
herpresentrol
e;
*Capabil
it
iesofeachemployeei
nrel
ati
ont
ohi
sor
herexpectedfut
urerol
e(s)
;
*Dyadic(groupoftwopeopl
e,smal
lestpossi
ble
group)relat
ionshi
pbet
weeneachempl oyeeandhi
s
Joi
nCAI
IBWI
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orhersuper
visor
;
*Team spi
ri
tandfunct
ioni
nginev
eryor
gani
sat
ional
unit(
depart
ment,
group,etc.
);
*Coll
abor
ati
onamongdi
ff
erentuni
tsoft
he
organi
sat
ion;and
*Organi
sat i
on'
sov er
allheal
thandself
-renewi
ng
capabil
it
ies,which,i
nturn,i
ncreaset
heenabli
ng
capabil
it
iesofindivi
dualsandtheenti
re
organi
sation.
Thetypi
calsy
stemsdevel
opedtoenhance
achi
evementoftheseHRDgoal
sincl
ude:
*
Trai
ningandDev
elopment
*
Per
for
manceAppr
aisal
,FeedbackandCounsel
l
ing
*Pot
enti
alAppr
aisal
,Car
eerPl
anni
ngand
Counsel
li
ng
*
Organi
sat
ionalDev
elopment
*
HumanResour
ceI
nfor
mat
ionSy
stem (
HRI
S)
*
Tal
entManagementandSuccessi
onPl
anni
ng
Joi
nCAI
IBWI
THASHOKonYouTube
Letusnowbri
efl
yexami
net
hel
inkagesamongst
thr
eesub-
syst
ems:
TheHRM br oadlyhasthr
eesub- syst
ems, vi
z.,
administ
rati
ve,devel
opment aland
maintenance.
Therearestronginter-
li
nkages
bet
weent hesethree.
wear
efocusi
ngonl
yondev
elopment
alsubsy
stems.
I
tmustbehi ghli
ghted,i
nt hi
scontext,
thatsi
nce
workisthepivotalpoi
ntfordevel
opmentof
i
ndi
v i
duals,t
hejobanalysisisf
undament alt
oany
oft
hesub- syst
emsment ionedabov e.
AsuccessfulHRmanagerdeeplyunderstandsthe
complexi
tyofeachjobintheorgani
zati
onbothi n
ter
msofact i
vit
iesi
nvolv
edandt hetypeofpersons
sui
tedtoperfor
mt hoseacti
vi
ti
es.
Thisunderstandi
nghel pshi
mt oimpl
ementvar
ious
HRM functionseffect
ivel
ywiththeai
mtoprovi
de
ri
ghtpersonf ort
her i
ghtjobatri
ghtt
ime.
Thus,t
heJob/RoleAnalysi
sbecomeasignif
icant
act
ivi
tytoachi
evetheabovest
atedobj
ecti
ve.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(
PART-I
II
)
Whatwewi
llst
udy
?
*
Whati
sJobAnal
ysi
sandRol
eAnal
ysi
s?

Job/
Rol
eAnal
ysi
s:
JobAnaly
sisi
satechniquewhi
chfaci
li
tat
est
he
l
ist
ingofwhati
srequi
redtoper
for
m ataskoraj
ob.
Atr
adi
tionaljobanal
ysi
scomprisest
hreepar
ts-
j
obdescript
ion,j
obspeci
fi
cat
ionandjobeval
uat
ion.
Howev er
,withtheincreasi
ngcomplexi
tiesofjobs
andli
nkageofcompl exi
ti
eswitht
hewagest ructur
e,
thej
obev al
uat i
onbecomesani ndependent
exer
ciseoutsidethejobanaly
sis.
Thus,t
hej obanal ysispri
mar i
lyf
ocusesonJob
Descr
iption( acti
vi
tiesinvol
ved)andJob
Speci
fication(requirementofpersonint
ermsof
qual
if
icationandat tribut
es).
Joi
nCAI
IBWI
THASHOKonYouTube
JobDescri
pti
on:Thi
ssi
mplyrecor
dseachand
ever
ycomponentoft
hejobwhi
chanindi
vi
dualhas
toperf
orminagiv
enset
-up.
Forexampl e:f oraj obofast enographerora
priv
atesecr et ary ,t
hejobdescr i
pti
onmayi ncl
ude
taki
ngdi ctation, t
ypingthemat t
er,keepingthe
recordofboss' sengagement s,dealingwithand
taki
ngcar eofv isit
ors,r
ecor
dkeepi ngofinwardand
outgoingcases, prepari
ngtravelplanofboss, f
il
ing
l
etters,etc.
JobSpecifi
cati
ons:Ont hebasisoft hejob
descr
ipti
onal i
stofrequir
ement sisprepar
edi n
ter
msofeducat ionalqual
ifi
cati
on,age,work
exper
ience,specif
icknowledge,skil
ls,
expert
ise,
temperament,etc.
Againintheexampleofastenogr
apherorapri
vat
e
secretar
y,acer
tai
ntemperamentandskil
lsar
e
requir
ed.
Forexample,
besidest
heshort
handandtypi
ng
ski
ll
s,theper
sonneedtohaveagoodknowledgeof
l
anguage(Engli
shand/orHi
ndi
),mat
uri
ty,
charming
Joi
nCAI
IBWI
THASHOKonYouTube
per
sonal
it
y,shar
punder
standi
ng,
pat
ience,
etc.

JobEv
aluat
ion:
Jobev al
uati
ont houghistr
eatedasanindependent
acti
vit
youtsidetheJobAnal ysi
sbutthej
ob
analy
sisprovidessigni
fi
cantdata/
inf
ormati
on
whichisusefulforJobEvaluati
on.
JobEvaluat
ionisprimari
lyusedtocompare
si
milar
it
ybet weenjobswithi
nanorganisat
ionor
bet
weenor ganisat
ionsoreveninanindust
ry.
Thus,t
hisisoft
enthebaseforwagesett
lements
andisusedforcompari
sonoftwoormor ejobsi
n
ter
msoft hei
rcomplexi
ti
esandcompetence.
I
tmaybenot i
cedt hattheJobAnalysis(Job
Descript
ionandJobSpeci fi
cat
ion)canpr ov
idet
he
basicdatafori
mpl ementati
onofvariousHR
functi
onsbothtraditi
onalandmoder n.
Forexampl
e,i
tcanpr
ovi
det
hebasi
sfor
Joi
nCAI
IBWI
THASHOKonYouTube
ManpowerPl
anning(toassessthet
ypeand
numberwi
thdif
ferentski
ll
s/compet
enci
es)
,
Recruit
mentandSelecti
on(t
oidenti
fyandsel
ect
personswit
hrightski
ll
s/competenci
es),
Trai
ningandDev el
opment(t
ocarryouttr
aini
ng,
needident
if
icati
onandbuil
dingcapabi
li
ti
es
whereverl
acking),
Perf
ormanceManagement(
tomeasureresul
tsand
achi
evementagai
nstt
heact
ivi
ti
esi
denti
fied)
,
RewardandCompensati
on(t
ocompensate
employeesf
orthei
rcont
ri
but
ionagai
nstt
he
act
ivi
ti
esperf
ormed),
Tal
entManagementandSuccessi
onPlanni
ng(t
o
i
denti
fyt
alent
sandnurtur
ethem f
orf
uturej
obs/
posi
ti
onstooccupykeyposi
ti
ons)
,
CareerPl
anning(t
oplanthegrowthofempl
oyees
keepingi
nviewthejobrequi
rements)
.
I
tisrel
evanttonot
ethattherear
evari
ouster
ms
whichareusedtodescr
ibetheworkpeopl
edoinan
or
ganisati
on.
Joi
nCAI
IBWI
THASHOKonYouTube
Termsl
iketask,j
ob,posi
tion,
rol
e,andwor
kar
e
oft
enusedinter
changeablybuti
nacademi
cst
hese
haveacert
ainrel
ati
onshipwitheachot
her
.
PareekandRao(1986)hav
eexpl
ainedt
he
rel
ati
onshi
pasfoll
ows:
Task:Thi
sisapieceofwork.Thisi
sabasic
el
ementofaj obandassuchrequir
esapersont
o
dothetasktoachi
eveaspecifi
cproduct
.
Job:Thi
sisacomplexsy
stem oftasksrequi
ri
ngan
i
ndivi
dualt
oachi
eveanoveral
lproduct.
Position:Putsanindivi
duali
nahi erarchi
calpatt
ern,
expect ingt
hosebel owtoreportorsurrendert
o
higherpositi
onsandconf ir
mt otheirexpectat
ions
whi l
et hosehigherupmaybel edtoexpl oi
tthe
relat
ionshipanddemandconf ormit
y .
Role:Emphasi
sesont
hepat
ter
nof(
mut
ual
)
expect
ati
ons.
Wor k:Invol
vesamor ecompl
expatternasitgoesa
stepf urt
hertoencompasssoci
o-psychol
ogical
relat
ionship.
Joi
nCAI
IBWI
THASHOKonYouTube
Thet radi
ti
onalconceptoftaskandJobhasthe
problem oftr
eati
ngindivi
dualsasthemeansto
achievetheproductasani sol
atedmachi
ne.
Per
haps,i
tissuchaperspect
ivet
hatal
ienat
est
he
i
ndi
vidual
sfrom whatt
heydo.
Theconceptofposit
iont
oo,makesoneperson
powerf
ulinrel
ati
ontoother
sandisl
ikel
ytohavea
de-
humanisi
ngef f
ect.
I
tistheconceptofroleorwor kwhicht
akesan
i
ndiv
idualoutofthetradit
ionalf
rameworkandputs
i
nacompl exrel
ationshipinvol
vi
ngjob-
self
-ot
her
s.
I
ntheHRDperspecti
ve,
rol
eisav
eryr
elev
antand
mandat
oryconcept
.
Likeajobanal
ysist
echnique,t
her ol
escanbe
analy
sedbyusingtheRoleAnalysisTechnique
(RAT)ofwhichjobanal
ysisisasignif
icant
component.
Inaddi
ti
ontomer el
yli
sti
ngtheacti
vi
ties,
expect
ati
onsofthecounter
part
s–al lthoserelat
ed
tothegi
venrol
e–( rol
eset)ar
ealsoconsi der
ed.
Joi
nCAI
IBWI
THASHOKonYouTube
I
nt heframeworkofrol
e,theKeyPer
formance
Areas(KPA)areident
if
iedandthecr
iti
calat
tri
but
es
thatanindi
vi
dualneedtoperfor
m ef
fecti
vel
yare
l
isted.
Pr
ocessofJobAnal
ysi
s:
Jobanalysi
sistheprocessofstudyi
ngand
col
lect
inginf
ormati
onr el
atedt
oaj ob.
Itpr
ovi
desinf
ormati
onrel
atedt
ojobdescr
ipt
ion
andjobspeci
fi
cat
ion.
Thejobdescri
pti
onisthefact
ualst
atementoft
he
dut
iesandresponsi
bil
it
iesofaspeci
ficj
ob.
Ajobdescr
ipt
ionl
istsoutt
heact
ivi
ti
esi
nter
msof
whati
stobedone, howiti
stobedoneandwhyi
tis
t
obedone?
Jobspecif
icat
ionisaboutthemini
mum accept
abl
e
l
evelofknowledge,ski
ll
sandotherat
tri
but
es
necessar
ytoperform ajob.
Iti
ncorporat
esthestandar
doftheindi
vi
dual
s'
designatedqual
it
iestoper
for
m ajobatan
acceptablel
evel
.
Joi
nCAI
IBWI
THASHOKonYouTube
Therefor
e,theprocessofconducti
ngjobanalysis
shouldbewel ldef
ined,
sci
entif
ic,
transparent
,
object
iveandbasedonconcr etedata/i
nformati
on.
Thus,thesour
cesofdat a,
processofdat
a
col
lecti
onandpr ocessofdat
aanalysi
saret
he
i
ntegralpar
tofjobanalysi
sprocess.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(
PART-I
V)
Whatwewi
llst
udy
?
*
Whati
sJobAnal
ysi
s?
JobAnal
ysi
s:
Thesour cesofdata,pr
ocessofdatacoll
ect
ionand
processofdat aanal
ysi
saretheint
egralpar
tofjob
analysi
spr ocess.
Sour
cesofDat
a/I
nfor
mat
ion:
Foranal
ysingajob,dat
acanbeobtai
nedf
rom
var
iousstakeholder
sandexper
ts.
Thus,themajorsourcesofinf
ormationareJob
holder
,Supervi
sors,
Cust omer
s'feedbackand
Expert
s( Jobanal
ysts).
Jobhol
der
:
TheJobholderhasthefir
sthanddi
rectknowl
edge
ofvar
ioustasksandactiv
iti
esi
nvol
vedin
per
formingthejob/
tasks.
Joi
nCAI
IBWI
THASHOKonYouTube
Hecangivemorecompr ehensi
v edetail
sabout
eachact
ivi
typer
formedbyhi m/herincludi
ngthe
const
rai
ntsandresour
cer equi
rement s.
Theinf
ormati
onpr
ov i
dedbythejobhol
dercanbe
val
idat
edthr
oughothersour
ces.
Super
visor
s:
Super
visor
sareexpectedtounder
standthej
obwel
l
i
nordertosuper
visethejobeff
ect
ivel
y.
I
fthesuper
visordoesnotdi
rect
lysuper
viset
hej
ob,
i
tmaynotbeabl etoprov
ideval
iddata.
Thesuper v
isor
'svi
ewscanbeusef ulfor
redesi
gningthejoborseei
ngiti
nabr oader
perspect
iveoforgani
zati
onalef
fecti
veness.
Thej
obholdercangi
veali
mitedper
spect
iveashe
i
sfamil
iarwi
ththatj
obonl
y.
Someti
mes,thejobholderredef
inest
heact
ivi
ti
es
tosui
thi
s/hercapabi
li
ties.
Thus,thesupervi
sor'
sinf
ormat
ioncanbeaval
id
sourceforvali
dati
ngjobhol
der
'si
nfor
mati
onand
redesi
gningthejob.
Joi
nCAI
IBWI
THASHOKonYouTube
Cust
omer
s'Feedback:
Thought hecustomer s'
feedbackisnotav er
y
popularsourceofinformationcol
lect
ion,yet
customer saregoodsour ceofinf
ormationto
understandaj obespecial
lywherethejobrel
atesto
deali
ngwi thcustomerandcust omerssati
sfacti
on
determinesthesuccessofj obexecuti
on.
Thecompl ai
ntsandappreciat
ionsf
rom t
he
customer scangivetheclueaboutt
heimport
ance
ofvari
ousact ivi
ti
esperf
ormedandt he
l
acunae( khami)inthepr
ocessofperfor
mingthese
acti
vit
ies.
Experts:Theexper t
sort hetrainedjobanal
y st
scan
provi
desi gnifi
cantinformationbyscienti
fi
cally
coll
ecting,processing,presentinginthef
orm of
processdocument s,flowchar ts,
customer
complai ntrecords,j
obhol dersandsupervisors
vi
ewsi npr operl
ydesi gnedf or
mat s.
Somet i
mes, t
heext er
nalconsult
antsar
ei nfl
uenced
bytheirobservati
onsinrespectofsimi
larjobsin
otherorgani
sationswhichtheyhadanalysed.Ital
so
Joi
nCAI
IBWI
THASHOKonYouTube
i
nvol
vest
hecostt
oengageext
ernalexper
ts.
Pr
ocessofDat
aCol
lect
ion:
I
nter
view:
Int
ervi
ewisthemostpopul
armet
hodofdat
a
coll
ect
ion.
Thejobanalysti
nter
actswiththejobholderand
his/
hersupervi
sortogathertheinf
ormationrel
ated
totheacti
vi
ti
esinvolv
edi nperf
ormingthejob
successf
ull
y.
Thisintervi
ewhelpsi
ngett
ingt
heli
stofski
ll
sboth
technicalandbehavi
our
ali
nperf
ormingt
hejob.
Itshoul
dnotbeviewedinisol
ationbutasther
ole
ofthejobhol
deri
nt heoveral
lcontextofhi
s
unit/
depar
tmentororgani
zati
on.
Someti
mes,astructuredquest
ionnai
reisprepar
ed
bytheanal
ystt
oelicitther
elev
antresponses.
Theanswersmaybeopenendedt
othose
st
ruct
uredquest
ions.
Joi
nCAI
IBWI
THASHOKonYouTube
Simi
larst
ructur
edquest
ionnai
resmaybeusedt
o
gett
heinformati
onfr
om thesuper
visor
.
Theanal
ystshoul
dbef r
iendlyanddevel
opa
tr
ust
worthyrel
ati
onshi
psot hatherecei
vesr
eal
andfr
ankanswerstohisquer i
es.
Anassurancetot hej
obhol derisalsor
equi
redto
ensurehi
m/ herthatt
hisexerciseisnowayplaya
detr
imentalrol
einhis/hercareer.
Effor
tshoul
dbemadet
ocol
lectt
hef
act
srat
her
thantheopi
nions.
Quest
ionnai
re:
Thequestionnai
retechni
queisv er
yusefulwhen
thei
nformationi
scol l
ect
edf r
om manyj obholder
s
perf
ormingsimil
arjobstohav eabroaderand
comprehensivevi
ewaboutt hejobdescripti
onand
knowledgeandskil
lsrequir
edt operf
ormt hejob.
Thismethodi
smoreeconomi
calandf
ast
ert
han
theint
erv
iewmet
hod.
Thequest
ionnai
reshoul
dbedesignedthought
ful
ly
wit
hthehelpofexper
tssot
hatitprovi
des
Joi
nCAI
IBWI
THASHOKonYouTube
maxi
mum i
nfor
mat
ionr
equi
red.
Itshouldbesi
mpletounderst
andandshoul dbei
n
thelanguagei
nwhichtherespondent
sar e
comf or
tabl
etounder
standandanswer .
Sometimes,thei
nformat
ioncol
lectedthroughthe
questi
onnai
resareusedasthebasei nf
ormationfor
conducti
ngjobanaly
sisr
elat
edintervi
ew.
Obser
vat
ion:
Obser
vinganemploy eewhil
eworki
ngonaj obis
consi
deredasanimpor t
antmet
hodf orconduct
ing
ajobanaly
sisexer
cise.
Itcanbethroughv
ideot
apingorremotemonit
oring
throughvi
deocameraalso,i
fthejobhol
derf
eels
uncomf or
tabl
ewit
hthepresenceofanobserver
.
Observat
iongenerall
yrequireswor
ksampli
ng,
whichistheprocessoftakingthesampl
eofwork
act
ivi
ti
esofani ndiv
idualoragroup.
Systemati
cworksampli
ngandobser
vingthejob
holderatapr
e-det
ermi
nedti
meisveryimport
ant.
Joi
nCAI
IBWI
THASHOKonYouTube
Thechal
lengewiththi
smet hodi
sthatt
hejob
hol
dergeneral
lyknowsthatheisbei
ngobser
ved.
Itcanbet hroughv
ideot
apingorremotemonitor
ing
throughvideocamera,i
fthejobholderf
eel
s
uncomf or
t abl
ewit
hthephy si
calpr
esenceofan
observer.
Theobservati
onmet hodisgeneral
lymoreti
me
consumingcompar edtotheint
ervi
ewor
questi
onnair
emet hodbutprovi
demuchdet ai
led
andaccuratedataabouttheacti
vit
iesper
for
med
andtheirmethodsofexecuti
on.
Dat
aAnal
ysi
s:
Aftercoll
ecti
onofdat afrom dif
fer
entst
akeholder
s
throughinter
views,observati
onandquesti
onnaire
met hods,i
tisdiscussedwi t
htheexpert
stoclearl
y
drawt heJobDescr i
ptionandJobSpecifi
cati
on.

Thejobdescr
ipt
ioni
spr
esent
edi
nthef
oll
owi
ng
heads:
JobDescr
ipt
ion:
Joi
nCAI
IBWI
THASHOKonYouTube
JobIdenti
fi
cati
on(j
obti
tl
e,alt
ernat
esuggest
edt
it
le
(i
frequi
red),
depar
tment,
plantandjobcode)
JobSummar y(
Iti
sdefi
nit
ionoft
hej
oborf
urt
her
expl
anat
ionofj
obtit
le)
Duti
esPerf
ormed( Itisthehear
tofJDwhi ch
i
ncludest
helistofallacti
vi
ti
esalongwit
hhowitis
doneandpurposebehi ndeachacti
vit
yi.
e.what
,
howandwhyofaj ob)
Supervi
sionGivenandReceiv
ed(Thisi
ncludes
ti
tl
esandbr i
efdescri
pti
onofjobsi
mmedi atel
y
aboveandbel owanddegreeofsuperv
isi
onand
i
nterdependenceinv
olved)
Relationstootherjobs(Thi
sidenti
fi
esv
ert
icaland
horizontalrel
ati
onshipsofworkfl
owand
procedur es)
Machi neToolsandMat eri
als(Thisisalistof
machi nes,
toolsandmat eri
als,defi
ningthemaj or
typesandhast radenameswher evernecessary)
Wor kingCondit
ions(i
ncludesphy si
cal,
environmentali
ncludi
nghazar douscondi t
ions)
Joi
nCAI
IBWI
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JobSpeci
fi
cat
ion:
Educati
onalQuali
fi
cati
on(incl
udesessentialand
desi
rabl
equalif
icat
ionsreceiv
edfrom academi c
i
nsti
tuti
ons)
Professi
onalQual
if
icat
ion(
itmayalsoi
ncl
ude
cert
ifi
cati
ons,t
rai
ningr
ecei
ved,et
c.)
Experi
ence(thedurat
ionandt
ypeofexper
ience
essent
ialanddesir
able)
KnowledgeandSkil
ls(
lev
elofknowledgeandski
ll
s
requi
redwhichcanbedemonstrat
ed)
Per
sonali
tyCharact
eri
sti
cs(thebehav
iour
al
at
tri
but
esr equi
redf
orthejob)
Physi
calMake-
up(
thephy
sicalat
tri
but
esr
equi
red
fort
hejob)
I
nterests(t
hepassi
onandar
easofi
nter
est
)Ot
her
Requirements
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(PART-
V)
Whatwewi
llst
udy
?
*
Whati
sJohar
iWi
ndow?
Sel
f-
Dev
elopment
:
Sel
f-
awar
eness:
Under
standi
ngsel
f,hel
psinsel
f-
dev
elopmentand
usi
ngone'spot
ent
ialbet
ter
.
I
tisal
waysusefult
odot heSWOTanal y
sisofsel
f
t
ounderst
andtheStrength,
Weaknesses,
Oppor
tuni
ti
esandThr eat
s.
Thismayhel pi
nbetteruseofstrengths,
overcomingweaknesses,capit
ali
zingthe
opportuni
ti
esandsafeguardingagainstt
hreat
s.
Iti
sr el
evanttor
efert
otheconceptofJohari
Windowgi venbyJosephLuftandHarr
yIngham
(LuftandIngham)whichexpl
ainswhati
smeantby
self
-awareness.
Joi
nCAI
IBWI
THASHOKonYouTube
I
tiscal
ledJohar
iaf
tercombi
ningt
hei
rfi
rstnames,
Joe+Har
ry.
Theaut
hor
sref
ert
othet
wodi
mensi
ons,
viz.
,
(i
)howmuchofone'
sbehav
iouri
sknownt
o
hi
m/ her
;&
(
ii
)howmuchhef
eel
sot
her
sknowhi
m/her
.
Thesetwodi
mensionsgivef
ourwi
ndowscal
led
Arena,
Bli
nd,
Closed,Dar
k.
Thedi
agr
am bel
owexpl
ainst
hemodel
.

Knownt
oSel
f NotKnownt
oSel
f
Knownt
oot
her
s Ar
ena Bl
ind
NotKnownt
oOt
her
s Cl
osed Dar
k
Joi
nCAI
IBWI
THASHOKonYouTube

Ascanbeseent heareawhichisknowntosel
fand
othersi
stheArena(open)aspectofone'
s
personal
it
yandonewhi chisnotknowntobot
his
theDarkaspect
.
TheBli
ndsect
ioni
sknownt
oot
her
sbutnott
he
sel
fand
TheCl
osedsect
ioni
scl
osedt
oot
her
ssot
osay
.
Thecl
osedwindowisal
sor
efer
redasPr
ivat
e,
bei
ngpri
vat
etoself
.
Joi
nCAI
IBWI
THASHOKonYouTube
I
nthi
s,t
hesi
zeofar enaoropenspacei
scr
it
icalf
or
i
mprovi
ngef
fect
iveness.

Iti
simpli
edthatt
hemor etheper
sonf eel
s,t
he
other
sknowhim/ her
;moreandbett
erconducive
theenvi
ronmentbecomesandthestrongerthesel
f-
concept
.
Aswedel iber
ated,themoreoneknowsabout
oneself
,thebetterequi
ppedheistof
acethe
chal
lenges.
Joi
nCAI
IBWI
THASHOKonYouTube
Thestrat
egyt oincr
easetheAr ena(open-
self
)
i
mpl i
esthattheindivi
dualsensit
iseshi
mselfto
recei
vefeedbackf r
om othersandbymaki ngmore
andmor edisclosur
es.
Thus,
therecei
vi
ngfeedbackandself
-di
scl
osur
es
hel
pinincr
easi
ngtheArena(open-
self
).
Suchper
sonsaremor etr
ustwor
thy,opentoother
's
i
deasandsuggest
ions,havebet
terself
-awar
eness.
Joi
nCAI
IBWI
THASHOKonYouTube&App
ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(
PART-
VI)
Whatwewi
llst
udy
?
*
Whati
sat
ti
tude?

ATTI
TUDEDEVELOPMENT:
Def
ini
ti
on
Theter
m“ at
ti
tude’
isfr
equentl
yusedtodescr
ibe
peopl
einter
msoft hei
rbehav
iourandi
tsimpacton
behavi
our
.
Mor epr ecisely,anat
tit
udecanbedef inedasa
persistentt endencytofeelandbehaveina
parti
cul arwayt owardssomeobj ect(i
ncludi
ng
peopl e,organisati
ons,product
s,pract
ices,i
deol
ogy
,
etc.
).
Forexampl
e:Ram doesnotl
ikeaj
obi
nvol
vi
ng
tour
ing.
At
ti
tudecanbechar
act
eri
sedi
nthr
eeway
s.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Fi
rst
,att
it
udetendst
oper
sistunl
esssomet
hingi
s
donetochanges.
Second,att
it
udecanf al
lanywher
ealonga
conti
nuum from v
eryfavour
ablet
ov ery
unfavour
ableorposit
ivetonegat
ive.
Thir
d, t
heat t
it
udeisdi
rect
edtowardssomeobj ect
aboutwhichaper sonhasper
cepti
on,feeli
ngsand
bel
iefs,whichinmanycasesmayresultint
o
emotionall
ychargedopini
onandprej
udices.
Sincetheatti
tudesarenotformedonthebasisof
rati
onal,obj
ecti
veandcompl etei
nfor
mati
on,it
result
sintodif
ferentat
ti
tudeofdif
fer
entper
sons
forthesameobj ect.
Component
sofAt
ti
tudes:
Att
it
udecanbebr okendownint
othreebasi
c
components,
viz.
,emoti
onal
,i
nformati
onaland
behavi
our
al.
Theemot i
onalcomponenti
nvol
vestheperson's
feel
ingsorthei
raff
ect
-posi
ti
ve,neut
ralornegati
ve
–aboutanobj ect
.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Emoti
onsplayaveryi
mportantr
olein
or
gani
sati
onalbehavi
ourofemployees.
Theexpressi
onofemoti
ons,ei
therposi
ti
veor
negat
ive,i
salsoi
mport
anttoworkbehaviour
.
Thei nf
ormati
oncomponentconsi
stsofbel
iefsand
theinformat
iont
hatani
ndivi
dualhasaboutthat
object.
General
ly
,thebel
iefsortheinfor
mationare
foundedoninsuf
fici
entobservat
ionsoropi
nions
whichmaynotbeempi rical
lycorr
ect.
Amanagermaybel i
ev ethat2week'
str
aini
ngi
s
suff
ici
entf
oranempl oyeetoeff
ecti
vel
yworkas
syst
emsadmi ni
str
ator.
I
nreal
ity
,mi
nimum 4weekst
rai
ningmaybe
r
equir
ed.
Thebel
iefoft
hemanagerr
epr
esent
shi
sat
ti
tude
aboutt
hetrai
ning.
Thebehaviour
alcomponentconsist
sofaperson'
s
tendencyt
obehaveinaparti
cularwayt
owardsthe
object
.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Forexample,themanageri ntheaboveexample
mayassignonl y2weeksf ort
heSy st
ems
Administ
rat
iont r
aini
ngtoanempl oyeewhichmay
notbesuffi
cientfortheemployeetoperf
orm hi
s
j
obef f
ecti
vely.
Thus,t
heatti
tudeshavesi
gni
fi
cantimpacton
workpl
aceforachiev
ingt
heorgani
zati
onal
obj
ecti
ves.
Si
gni
fi
canceofAt
ti
tudeatWor
kpl
ace:
Anunderst
andingoftherol
eofatti
tudesis
i
mportantt
ost udyandunderst
anditsimpacton
humanbehaviouratworkforanumberofr easons.
At
ti
tudeshel
ppr
edi
ctwor
kbehav
iour
.
Forinstance,
ifanatt
itudesurv
eyshowst hat
workersareupsetbyachangei ntheworkrules,i
t
mayhav eanimpactont hei
rworkbehav
iour.Itmay
resul
tlargeabsent
eeism.
Themanagementmayconcl
udethatthenegat
ive
att
it
udetowar
dswor
krulehasr
esultedint
o
absent
eeism.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Anotherreasonwhyanunderst
andi
ngofatt
it
udei
s
i
mpor tanti
sthatatt
it
udeshel
ppeopl
eadaptto
thei
rwor kenvi
ronment.
Organi
sat
ionsassi
gnlotofi
mport
ancet
oat
ti
tude
forsel
ect
ingandpost
inganyemploy
eef
orajob.
Impart
ingknowledgeandski
ll
siseasiercompared
tochangi
ngtheat t
it
udeofapersontowardsthejob
andorgani
sati
on.
Withanegat
ivelyori
entedatt
it
udeanemployee
gener
all
yfi
ndsf aul
tinever
ysolut
ionandis
gener
all
yremainsthepartoftheprobl
em r
ather
thant
heconstructi
vesolut
ion.

At
tit
udesservef
ourimpor
tantf
unct
ionsi
nthe
pr
ocess.Theseare:
(
1)TheAdj
ust
mentFunct
ion,
(
2)TheEgo-
Def
ensi
veFunct
ion,
(
3)TheVal
ueExpr
essi
onFunct
ion,
and
(
4)TheKnowl
edgeFunct
ion.
Joi
nCAI
IBWI
THASHOKonYouTube&App
TheAdj
ust
mentFunct
ion:
Att
it
udesoft
enhel
ppeopl
eadj
ustt
othei
rwor
k
envi
ronment
.
Whentheemployeesareproperl
ytr
eatedbythei
r
boss,
theyar
elikelyt
odevelopaposit
iveat
ti
tude
towar
dssuperv
isionandtheorgani
sati
on.
Theseatt
it
udestheref
orehel
pemployeest
oadjust
tothei
renvi
ronmentandareabasi
sforfut
ure
behavi
our.
TheEgo-
Def
ensi
veFunct
ion:
Besi
deshelpi
ngemployeestoadj
ust
,at
ti
tudesal
so
hel
pthem def
endthei
rself
-i
mage.
Forexampl e,
anol dermanagerwhosedeci si
ons
arecont i
nual
lychallengedbyay ounger
subordinatemayf eelthatthel
atteri
sbrash,
cocky
,
i
mmat ureandinexper i
enced.
Maybet hey
oungersubordinat
eisr
ighti
n
chal
lengi
ngthedeci
sions.
Theoldermanagermaynotbeeff
ect
iveandmay
betaki
ngpoordecisi
onsbuthei
snotgoingt
o
Joi
nCAI
IBWI
THASHOKonYouTube&App
admi
tthi
sandwi
llt
ryt
opr
otecthi
sego.
Asaresult
,theol
dermanagerwil
ldevel
opnegat
ive
at
ti
tudetowardst
heyoungeroff
icer
singener
al.
TheVal
ue-
Expr
essi
onFunct
ion:
Atti
tudespr
ov i
depeoplewi
thabasi
sfor
expressi
ngtheirv
alues.
Forexampl e,amanagerwhobel i
evesstrongl
yin
theworket hi
cwi l
ltendt
ov oi
ceattit
udestoward
specif
icindivi
dual
sorwor kpract
icesasameanst o
ref
lectthi
sv al
ue.
Asuper
visorwhowantsasubor
dinat
etowor
k
har
dermightputi
nthi
sway:
“
Youhavetoworkharder
.Thathasbeenthe
t
radi
ti
onofthecompanysincei
thasbeenfounded”
.
Thi
sal
sohel
pst
osubscr
ibet
heet
hics.
TheKnowl
edgeFunct
ion:
Atti
tudeshelpsuppl
yst
andar
dsandfr
amesof
ref
erencethatall
owpeopl
etoor
gani
seandexpl
ain
thewor l
daroundthem.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Forexampl
e,auni
onof
ficebear
ermayhav
ea
negati
veat
ti
tudet
owar
dmanagement.
Thi
satt
it
udemaynotbebasedonfact
s,buti
tdoes
hel
ptheindi
vi
dualt
orel
atet
omanagement.
Asar esult
,ever
y t
hingthatmanagementsaysis
regardedbytheunionsasapackofl i
es,a
dist
ortionoft
ruth,oranattempttomani
pulate.
Regardlessofhowaccurat
eaperson'
sviewof
reali
tyis,
atti
tudest
owardpeopl
e,ev
entand
objectsimpactthei
ndi
vi
dualmakesenseoutof
whati sgoingon.
Joi
nCAI
IBWI
THASHOKonYouTube&App
ABM MODULE–C
Chapt
er21:Dev
elopmentofHumanResour
ses
(
PART-
VII
)
Whatwewi
llst
udy
?
*
Whati
sat
ti
tude?
Changi
ngAt
ti
tudes:
Aswehav eseentheatt
it
udesofempl oy
eeshave
si
gnifi
canti
mpactontheirbehavi
ouratwor
kpl
ace
whichresul
tsi
ntohi
s/herperfor
mance.
Iti
stheref
orenecessarytodeveloptheri
ght
att
it
udeoft heemployeesforthebenefi
tofbot
h,
theorgani
sati
onaswel lastheemployees.
Aposit
iveatt
it
udehel
psapersoninal
lspher
esof
l
if
eincl
udinghisor
gani
sat
ionalaswel
laspersonal
l
if
e.
Thoughitmaybediff
icul
t,i
tispossi
blet
ochange
theat
ti
tudesofpeopl
e.
Thelevelofdi
ff
icul
tydependsuponv ar
iousf
actor
s
i
ncludi
ngt owhatextentapar
ti
cularatt
it
udeabout
Joi
nCAI
IBWI
THASHOKonYouTube&App
apart
icul
arobj
ecti
sdeepr
out
edandemot
ional
ly
char
ged.
Themajorbar
ri
ersforatt
itudechangear
epr
ior
commit
mentandl ackofinfor
mation.
Apri
orcommitmentoccurswhenapersonfeel
sa
commitmentt
oaparti
cularcour
seofacti
onandis
unwi
ll
ingt
ochange.
Theinsuf
fi
cientinf
ormat
ioncandi
stor
ttheat
ti
tude
aboutsomeobj ect
.
Forexample,someonegoest
omeethisoldfr
iend.
Thefri
endcouldnotdevot
emuchtimetohisold
fr
iendbecauseofhisot
herur
gentcommit
ment s.
Becauseofonei nci
dencehemaydev el
opa
negati
veatti
tudeaboutthebehav
iourofhi
sfr
iend
whoot her
wisewasconsi der
edasav er
ygood
person.
Ther
earewaysi
nwhichthebar
ri
erscanbe
over
comeandat
tit
udescanbechanged.
Oneoft
hesei
sbypr
ovi
dingnewi
nfor
mat
ion.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Somet i
mesthi
sinformati
onwi l
lchangeaper
son'
s
bel
iefsand,
intheprocess,canchangehi
sorher
att
it
udes.
Thesecondwayofchangi
ngt
heat
ti
tudei
sthr
ough
theuseoffear
.
Resear
cher
shavefoundthatfearcancausesome
peopl
etochanget
heirat
tit
udes.
Howev
er,t
hedegreeoff
earseemst
obei
mpor
tant
t
othefi
nalout
come.
I
flowlevel
soff
earar
ousalar
eused,
peopl
eof
ten
i
gnorethem.
Thewarni
ngsar
enotst
rongenought
owar
rant
att
ent
ion.
I
fmoder at
elevel
soffearar
ousalareused,
peopl
e
oft
enbecomeawar eofthesit
uati
onandareli
kel
y
tochangetheatt
it
udes.
However
,ifhi
ghdegreesoffearar
ousalar
eused,
peopl
eoft
enrejectt
hemessagebecauseitist
oo
thr
eat
eni
ngandt husnotbel
ievabl
e.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Agoodexampl
eisprov
idedi
nthecaseof
ant
ici
gar
ett
esmoki
ngcampaigns.
Whent hedepar
tmentofheal
thrunsadsusing
pati
entswhoaredyi
ngofcancer,themessageisso
thr
eateni
ngtosmokersthatmanyofthem shuti
t
out.Theyref
usetol
ist
en.
Thethir
dwayofchangi
ngt heatt
it
udei
sby
resol
vi
ngthedi
scr
epanciesbetweenat
ti
tudeand
behavi
our.
Forexample,
whenaj obseekerhasmoret
hanone
j
obof f
erandisforcedt
ochooseone,heof
tenf
eel
s
thathi
sfi
nalchoicemaygowr ong.
However,
oncehehaschosenapart
icularj
obhe
wil
lst
artfeel
ingt
hathehast
akenarightdeci
sion.
Hewi l
lst
artt
ohav enegat
ivef
eeli
ngtowardt
hejob
thatwasnotchosenandposit
ivefeel
ingt
owardt
he
companythatwaschosen.
Inf
luenceoff r
iends,peersandopini
onleadersal
so
hasagr eatrol
eonat t
it
udechange.Thus,therol
e
ofleadersbecomesv erycr
uci
alforchangi
ngand
developi
ngrightatti
tudesofthefoll
owers.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Theleadershavetodev
elopinter
personalt
rustand
presentthemsel
vesasrat
ionalpersonsi
nterest
ed
i
not her'
swell
being.
Additionall
y,whenaparticularmatt
erisofpersonal
i
nt er
esttopeopl e,t
heyarelikel
ytorej
ectextr
eme
discrepanciesbetweentheircurr
entbehavi
ourand
thatofot hers.
Thi
siswhyunethicalbehav
iourissodi
ff
icul
tto
combatbecauseofothermotives.
Themanagersar
ethef
ormall
eader
sofan
organi
sat
ion.
Thei
ratt
enti
onisf
ocusedonor
gani
sat
ional
obj
ecti
vesandper
for
manceofempl
oyee.
Ifapersoni
ntendstoi
mprovetheat
ti
tudeofan
i
ndivi
dualemployeeheneedst
obefriendl
ywit
h
him.
Thenonl
y,i
nduecour
se,
hewi
llknowt
heempl
oyee
andwhatmoti
vat
eshi
m.
Hewillal
soknowt
heempl
oyee'
spot
ent
ialand
shor
tcomings.
Joi
nCAI
IBWI
THASHOKonYouTube&App
I
nt hisprocessthemanagercanidenti
fythe
l
earningneedsofi ndi
vi
dualemployeesandcan
decidehowt ohelptheemployeeforacquir
ing
defici
entskil
ls.
Forthi
stohappen,t
hemanagerwil
lhav
et oknow
theemployeeandshoul
dbegenui
nelyi
nterest
edi
n
thedevel
opmentoftheempl
oyee.
Af i
nalwayinwhichatti
tudechangesoft
entake
placeisbyco-opti
ng,whichmeanstaki
ngpeople
whoar edissat
isf
iedwit
hasi t
uati
onandgetti
ng
them i
nvolvedini
mprovingthi
ngs.
Forexample,Johnisnotsat
isfi
edwit
ht hepr
esent
welf
areschemes, asaresul
tthecompanyappoint
s
hi
m asamemberoft heemployeewelfare
commi t
tee.
Oncehebeginsr eali
singhowthesebenefi
tsare
deter
minedandhowl ongandhardt hecommittee
workstoensuret hatt
hepeoplearegiventhebest
benefi
tspossi
ble, hei
slikel
ytochangehisatt
it
ude.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er22:HumanI
mpl
icat
ionsofOr
gani
sat
ions
(
PART-
I)
Whatwewi
llst
udy
?
*
Whati
sHumanResour
ce?
HUMANBEHAVIOURANDI
NDI
VIDUAL
DI
FFERENCES:
Understandingandappreci
ati
ngtheimpor t
anceof
i
ndivi
dualdi f
fer
encesanditsi
mpactonhuman
behaviourisoneofthemostcrucialaspect
sof
humanr esourcemanagement .
Aseachi ndiv
idualisdiffer
entfr
om theotherin
hi
s/herphy si
calappearance,heorshei salso
di
ffer
entf r
om ot herpersoninhi
s/herbehav i
our
andotherpsy chologi
calparameters,v
iz.
,feeli
ngs,
per
ception,values,etc.
Onefindsstr
iki
ngdif
fer
encesinint
ell
igence,
physi
calfeat
uresandpersonal
it
ytr
ait
s, et
c.,
among
peopl
e.
Joi
nCAI
IBWI
THASHOKonYouTube
Fr
om thedayofbi r
th,eachpersonisuni
que;
i
ndiv
idualexperi
encesafterbi
rth,
makepeopleev
en
morediff
erent.
Humanbehaviouri
sacompl
exphenomenon.I
tis
mostdi
ff
icul
ttodefi
nei
nabsol
utet
erms.
I
tispr
imari
lyacombi
nat
ionofor
igi
nat
ingand
r
espondi
ngbehavi
our
.
Thebehaviourr
efl
ect
sthepsy
chol
ogi
calst
ruct
ure
ofaperson.
Iti
sal sotheresul
tofbi
ologi
cal
,psy
chol
ogi
caland
socialprocesses.
Accordi
ngtopsychologi
stKur
tLewin,“behav
iouri
s
afuncti
onofthepersonandtheenv
ironment
ar
oundhi m”
.
Theset
wof
act
orsar
eli
nkedwi
theachot
her
.
Anyoneoftheseindiv
iduall
ycannotexpl
ainf
ull
y
thebehav
iour
alcharacter
ist
ics.
Thus,
dif
fer
entpeopl
ebehavedi
ff
erent
lyi
nthe
sameorsimil
arenvi
ronment
.
Joi
nCAI
IBWI
THASHOKonYouTube
Thebehavi
ourofani
ndi
vi
duali
sinf
luencedby
sev
eralf
actor
s.
Thesecanbegr
oupedundert
hef
oll
owi
ngheads:
Env
ironment
alFact
ors:
(a)Economi
c,(
b)Soci
al(
nor
msandcul
tur
alv
alues)
,
and
(
c)Pol
it
ical
;
Per
sonalFact
ors:
(
a)Age (
b)Sex (
C)Educat
ion (
d)Abi
li
ti
es
(e)Mar
italStat
us (f)Famil
ybackgr
oundandot
her
demographicalf
act
ors,et
c.
Or
gani
sat
ionalFact
ors:
(a)Natur
eofJob(
b)Or
gani
sat
ionSt
ruct
ureand
Design,
(c)Leader
shi
p,(
d)Compensat
ionandRewar
d
System,
(
e)Gr
owt
hOppor
tuni
ti
eset
c.
Joi
nCAI
IBWI
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Psy
chol
ogi
calFact
ors:
(a)Personal
it
y( b)Percept
ion (
c)At
ti
tudes(
d)
Values(e)Learni
ngetc.
Env
ironment
alFact
ors:
Thesefact
orsar
emainl
yext
ernalandt
heyal
so
i
nfl
uenceindi
vi
dual
'
sbehavi
our.
Thesebroadl
yincl
udethesoci
al,
cul
tur
al,
pol
it
ical
andeconomicenvir
onments.
Amongt hese,
economicenvi
ronmentdeter
mines
thebehavi
ourofanindi
vi
dualtoagreatext
ent.
Economicenvi
ronmentconsist
softhel
evelof
employment,
wagerates,economi
coutl
ook,et
c.
Cult
uralfactor
ssuchasworkethic,
achi
evement
needs,values,
etc.
,for
m par
toftheenvi
ronment
al
fact
ors.
Thepoli
ti
calcl
i
mat
eal
soi
nfl
uencesi
ndi
vi
dual
behav
iour.
Thestabi
li
tyoft
hegovernmentcancont
ri
but
eto
employmentoppor
tuni
ti
es.
Joi
nCAI
IBWI
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Thequal
it
yofthepoli
ti
calsyst
em al
sohasa
bear
ingonindi
vi
dualbehavi
our.
Thesoci
alenvi
ronment
,whichincl
udessoci
etal
normsandthefamil
yatmosphere,
alsoi
nfl
uences
tosomeextentthei
ndi
vi
dualbehavi
our.
Per
sonalFact
ors:
Everyindiv
idualbri
ngst ohiswor kpl
acesev eral
personalcharacteri
sti
cssuchasage, sex,
education,knowledge,int
ell
igence,abi
li
ties,f
amily
dependentsandsi milarotherrel
atedfactors.
Perf
ormanceofanindiv
idualdependsont
hese
fact
orst
oagreatextent.
Or
gani
sat
ionalFact
ors:
Thest ructureoft heorganisati
on, t
heavail
abil
it
yof
physicalfaci l
it
ies,theexist
enceofr ewardand
compensat ionsy stem,thepersonnelpoli
cies,
the
organisati
onalcul t
ure,etc.
,inf
luencethebehaviour
ofani ndividualinanor ganisati
on.
Thequali
tyofl
eader
shi
pal
soi
nfl
uencesi
ndi
vi
dual
behav
iour.
Joi
nCAI
IBWI
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Psy
chol
ogi
calFact
ors:
Thei ndi
vi
dualbehaviouri
sdeterminedtoagr eat
extentbyt hephy
sicalandmentalpersonal
it
iesof
thatindi
vidual
.
Theval
ues,
percept
ionsandat t
it
udesal
so
cont
ri
butet
otheindiv
idualbehavi
our
.
Sinceeachpersonisindivi
dual
lydi
ff
erentimpl
ying
thati
nordertomot i
vatetheemployeestheyhave
tobetreat
eddiffer
entlykeepi
nginviewtheneeds
andmot i
vesoftheempl oyees.
I
ftheneedsandmoti
vesoftwopersonsare
di
ffer
entt
heymustbetr
eateddi
ff
erentl
y.
Ifi
twerenotforindivi
dualdif
fer
ences,
some
standar
dscouldhav ebeenadoptedfordeal
ingwi
th
employeesandmi ni
mum j udgmentwouldhave
beenrequi
redthereaft
er.
Theremi
ghthav
enotbeenanydi
ff
erencei
ndeal
ing
wit
hmenandmachines.
Fr
om theorganisat
ionalangle,
managersusual
ly
vi
ewtheiremployeesasr at
ionalhumanbei
ngswho
Joi
nCAI
IBWI
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ar
epr
imar
il
ymot
ivat
edbymoney
.
Soci
alMan:
Accordi
ngl
y,t
heyadopt‘economicman’andthe
‘
rat
ionalman’approacht
ounderstandandpr
edict
humanbehaviour.
However
,ithasal
sobeenr
eal
isedt
hatmani
sal
so
asoci
albeing.
Hewantst
obelongt
oagr oup,
andhi
sbehav
iourat
t
heworkpl
aceshowsthi
s.
Oneofthewell-
knownstudies(Hawt
hornestudi
es)
hasmadei tcl
eart
hateconomicmotivesal
onedo
notexpl
ainhumanbehaviour.
Sociali
nteracti
onsatworkplace,especiall
yhow
theyaretreated,andhowtheircontri
butionsare
acknowledged, makeabigdiffer
encei ntheir
atti
tudetoper f
orm.
Thust
hei
deaof'
soci
alman’
wasdev
eloped.
Howev er
,ast
imepassedby,the‘
soci
alman'
appr
oachwasalsoconsider
edsomewhat
si
mplisti
c.
Joi
nCAI
IBWI
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Thi
sapproachdoesnotpayadequateatt
enti
ont
o
work,
itsi
ntr
insi
cnat
ureandit
sor gani
sati
on.
Nordoesitconcernit
selfwit
htheeconomic
funct
ionsandresponsibi
li
ti
esoftheent
erpr
ise.And
atti
mes, i
tispl
ainl
ymani pul
ati
ve.
Organisationalbehavi
ourtheorist
ssuchasAr gri
sG
C,LikertR, andMcGregorDar guedt hatpeopl
ein
organisati
onsneedoppor tunit
iestouset hei
r
creati
vityandt hi
sgrowthneedshoul dbemett o
enablethem t ocontr
ibut
eef f
ect i
vel
y.
Atthesametime,al
lemployeesmaynotwantto
devel
opandgrowont hei
rjob,t
heymayhavethei
r
pref
erenceel
sewher
e.
Hence,t
hecurrentt
hinki
ngistoacceptmanasa
complexbei
ngandt orecogni
sethatper
sonal
it
ies
al
waysdiff
er.
Joi
nCAI
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ABM MODULE–C
Chapt
er22:HumanI
mpl
icat
ionsofOr
gani
sat
ions
(
PART-
II
)
Whatwewi
llst
udy
?
EMPLOYEESBEHAVI
OURATWORK:
Thebehavi
ourofpeopl
eatworkplaceplay
san
i
mportantr
olei
norgani
sat
ionalsuccess.
Thebehavi
ourofanempl oy
eeasani ndiv
idualas
wel
lashisbehavi
ourinagroupmakesadi f
ference
i
nachievementofor
ganisati
onalandgroup
obj
ecti
ves.
Thetechni
calcompetenceofanindi
vi
duali
s
i
mpor t
antbutbeyondthathi
sbehavi
ourand
i
nter
personalski
ll
sareextr
emelyimpor
tant
.
Thepeopleintheorgani
sat
ionsdonotwor
kin
i
solati
on,thei
rrol
eandperf
ormanceis
i
nterdependent.
Theywor
kinteamswher econt
ribut
ionofeach
memberisi
mportantandsigni
fi
cant.
Joi
nCAI
IBWI
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Theteam-buildi
ngski l
lswhicharefoundedon
i
ndivi
dualbehav iourandinterper
sonalski
ll
scan
helpi
nget ti
ngsy nergyatwor kpl
acewherethe
cooperat
ionandcol l
aborat
ioncanimpr ov
et he
groupperformanceandout putbeyondthe
i
ndivi
dualcont r
ibuti
ons.
Synergyist
hehighestact
ivi
tyofl
ife,i
tcreatesnew
untappedal
ternat
ives;
itv
aluesandexploitsthe
ment al
,emoti
onalandpsychol
ogicaldi
ff
er ences
betweenpeople.
Therearesomebasi
cassumpt
ionsabouthuman
behavi
ouratwor
k:
1.Ther
ear
edi
ff
erencesbet
weeni
ndi
vi
dual
s.
2.ConceptofWhol
ePer
son.
3.Behav
iourofani
ndi
vi
duali
scaused.
4.Ani
ndi
vi
dualhasdi
gni
ty.
5.Or
gani
sat
ionsar
esoci
alsy
stems.
6.Therei
smut ual
it
yofint
erestamong
organi
sat
ionalmembers.
Joi
nCAI
IBWI
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7.Or
gani
sat
ionbehav
iouri
shol
ist
ic.
Per
sonsdi
ff
erandagai
n,ther
earecer
tai
n
‘
commonal
iti
es'
int
hepersons.
Ev
eryper
soni
s,i
ncer
tai
nrespect
s:
*
li
keal
lot
herper
sons,
*
li
kesomeot
herper
sons,
and
*
li
kenoot
herper
son.
Itindicatesthatanindivi
dualpossessessome
commonchar acteri
sti
csofmostoft hepeople
(gener al
izedcharacteri
sti
csofhumanbei ngs)l
ike
mostoft hepeopl eareself
ishormoneyis
i
mpor tanttoeveryoneorev er
yonewantst obe
treatedwel l
.
Hemayhav esomef eat
uresofsomeot herpeopl
e
whi
chcanbedi videdintobroadgroupsl i
ke
i
ntr
ov er
tsandextravert
sorhighrisktakers,
medium ri
sktakersandlowr i
sktakers.
Hemayal sohavesomecharacteri
sti
cswhichot
her
per
sonsdonothav e,
i.
e.,
thefeaturesuni
quetoan
i
ndivi
dualforwhi
chheisknown( hi
sunique
Joi
nCAI
IBWI
THASHOKonYouTube
per
sonal
it
ychar
act
eri
sti
cs)
.
Someofthehumancharact
eri
sti
csmaynotbe
cl
assi
fi
edint
ofewsub-gr
oupsrathert
hancanhav
e
aposi
ti
oninacont
inuum.
Humanpersonali
tyisthusacomplexand
mult
idi
mensionalphenomenon.Therei
sindeedno
si
mpledef
ini
tionofwhatpersonal
ityi
s.
Howev er
,personali
tycanbeexaminedint
ermsof
cert
ainstabl
echar act
eri
sti
cs,
tendenci
esand
behavi
ourpatterns.
Salvot
oreMaddidef i
nedper sonalit
yasast abl
eset
ofcharacterist
icsandt endenci esthatdetermi
ne
thosecommonal it
iesanddi fferencesinthe
psychologicalbehav i
our(thought s,f
eeli
ngs,and
acti
ons)ofpeopl et hathavecont inuit
yintimeand
thatmaynotbeeasi l
yunder stoodast hesoleresul
t
ofthesocialandbi ologicalpressuresofthe
moment .
Thisdefi
nit
iondoesnoti
mpl
ythatpeopl
edonot
everchange.
Joi
nCAI
IBWI
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I
tsi mplyi
ndi
catesthati
ndivi
dualsdonotchange
drasti
call
yover
nightandthei
rthought
s,feel
ings,
valuesandacti
onsremainrelat
ivel
yst
ableov er
ti
me.
Changesinpersonal
it
y/behavi
ourpatt
ernthattake
pl
aceinindiv
idual
soccurslowlyoveranextended
per
iodoftime.
Thusbyunder standingcertai
ndi mensionsof
personal
ityandbehav i
our,manager scan, t
oagreat
ext
ent,predictt
helikelybehaviourintermsof
act
ionsandout comesofact i
onsi nrespectof
employees.
Therearesever
alt
heor
iest
oexpl
aint
heconceptof
personal
it
y.
Onedimensionofpersonalitywhi chi
sgett
ing
att
enti
onbothf r
om organisationalaswel
las
medicalr
esearchersi
st heTy peAandTy peB
behavi
ourprof
iles.
Aper sonexhi
biti
ngTypeAbehav
iouri
sgener
all
y
rest
less,i
mpatientwi
thadesi
ref
orquick
achi
ev ementandperf
ecti
oni
sm.
Joi
nCAI
IBWI
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Type'B'personal
it
ypeopl
ear emuchmor eeasy
going,r
elaxedaboutti
mepr essure,
less
competiti
veandmor ephi
losophicalinnat
ure.
Fri
edman,MeyerandRayRosemanhavementi
oned
thefol
lowi
ngcharact
eri
sti
csofTy
pe‘
A’per
sonal
it
y:
Rest
lessbynature,
sot
hatheal
way
smov
es,
wal
ks
andeatsrapi
dly
.
Isi
mpati
entwit
hthepaceoft
hings,
disl
ikeswai
ti
ng
andisi
mpati
entwit
hthosewhoarenotimpati
ent
.
Mul
ti
tasker-doessev
eralt
hingsatonce.
Tri
estoschedulemoreandmorei
nlessandless
ti
me, i
rr
espect
iveofwhet
herev
ery
thi
ngisdoneor
not.
Usual
lydoesnotcompl
eteonet
hingbef
orest
art
ing
onanother
.
Oftendi
spl
aysner
vousgestur
essuchascl
enched
fi
standbangi
ngonatable.
Doesnothav
eti
met
orel
axandenj
oyl
if
e.
Joi
nCAI
IBWI
THASHOKonYouTube
TypeBper
sonali
tyexhi
bit
sjusttheopposit
e
char
act
eri
sti
csandismor erel
axed,soci
ableand
hasabal
ancedoutl
ookonl i
fe.
Wecomeacr
ossbot
hTy
peAandTy
peBManager
s
i
nbanks.
Usual
lyTy
peAManager'
scabi
nisunt
idy
,andgi
ves
aMessyappear
ance.
Furt
her,hi
stabl
eisfullofpaper
sandmanyat i
me,
i
tisdif
fi
culttot
raceimportantpaperskeptonhi
s
tabl
e.Hehasat endencyeventolosesomepapers
andtoblameothersforsuchal oss.
TypeBper sonal
it
y,however,
issyst
ematicand
methodicali
nhisday -
to-
daywork.Hehasfull
cont
rolovertimeanddoesnotcompl ai
noflackof
ti
meev enduet opressur
eofwork.
Thisisbecauseheplansthewor kinsuchaway
thaturgentandimport
antmat t
ersaredisposedof
i
nt i
me.Al t
houghheisbusyl i
kemanyot her
manager s,heappear
stotaket hi
ngseasyand
normallydoesnotgetdist
urbed.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er22:HumanI
mpl
icat
ionsofOr
gani
sat
ions
(
PART-
II
I)
Whatwewi
llst
udy
?
Developmentmodelofper
sonal
it
ydescr
ibedbyEH
Eri
ksonalsohel
psustounderst
andtheconceptof
personal
it
y.
Eri
ksonhasident
ifi
ed8devel
opment
alst
agesi
n
expl
aini
ngthepersonal
it
y.
Thesest
ageswhi
charebasedonaper
son'
sstat
eof
mindatagi
venpoi
ntoft
imearementi
onedbel
ow:
St
age1:Tr
ustv
s.Mi
str
ustoft
rust
St
age2:Aut
onomyv
s.ShameandDoubt
St
age3:I
nit
iat
ivev
s.Gui
lt
St
age4:I
ndust
ryv
s.I
nfer
ior
it
y
St
age5:I
dent
it
yvs.Rol
eDi
ff
usi
on
St
age6:I
nti
macyv
s.I
sol
ati
on
St
age7:Gr
owt
hvs.St
agnat
ion
St
age8:I
ntegr
it
yvs.Despai
r
Joi
nCAI
IBWI
THASHOKonYouTube
St
age1:Tr
ustv
s.Mi
str
ustoft
rust
Aschil
drenwedependonot
her
sforourv
ari
ous
needs.
I
ntheprocesswedev el
opfeel
ingsormi
strust
t
owardsothersdependi
ngonourexperi
enceabout
t
heful
fi
ll
mentofourneeds.
Simil
arl
y,i
ntheworkplace,
wemaynotknow
ever
ythi
ngaboutthejobandt her
efor
e,wear
e
dependentonot
hersforguidance.
Inthepr
ocesswealsodevelopfeeli
ngsoft r
ustor
mistr
usttowar
dsot
hersintheor ganisat
ion
dependi
nguponhowwel lt
heyrespondt oour
needsandhelpust
of i
ndourplacei nthesystem.
St
age2:Aut
onomyv
s.ShameandDoubt
Aschil
drenweexperiencedagr
eatneedt
obeon
ourownandwhenev erwesucceeded,
wefel
twe
arei
ndependentandautonomous.
Whenwef ail
edi
nsuchatt
empt
s,weexper
ienceda
senseofshameanddoubt.
Joi
nCAI
IBWI
THASHOKonYouTube
Simil
arl
y,i
ntheworkplaceaf
teri
nducti
onandini
ti
al
tr
aini
ng,wefeelhappywhenwecanf unct
ion
i
ndependentl
y.
Butwhenwecommi tmist
akeswest ar
tdoubt
ing
ourowncompetenceandexperi
enceasenseof
shamefornotdoi
ngthi
ngsright
.
St
age3:I
nit
iat
ivev
s.Gui
lt
Thisstagei
ndicat
est
hechild'
seff
ortsatt
ryi
ngto
dothingsonit
sowniniti
ati
veandfeel
inggui
lt
yif
mistakesar
ecommi t
ted.
Simil
arl
yasemployeeswet akei
niti
ati
veanduse
ourtal
entstoset
tl
edowni nthej
obs; i
fthi
ngsgo
wrong,wemayexperienceasenseofgui l
tthatwe
havewastedourenergyandtheresourcesofthe
organi
sati
on.
St
age4:I
ndust
ryv
s.I
nfer
ior
it
y
Aswegrowupwebecomedil
igentand
i
ndust
ri
ous.Wewantt
opur
sueourgoalsand
manageourli
fe.
Joi
nCAI
IBWI
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Ifwearesuccessf
ulintheseef
fort
s,wefeelgood
aboutoursel
f;i
fwefail
,wedevelopasenseof
i
nferi
ori
ty.
Similar
ly,
intheworkplacewet r
ytoworkhar
dto
fi
ndapl aceintheorganisati
on; i
fwearenot
successful,
wet endtosufferfrom af
eeli
ngofl
ow
self
-conceptandlowsel f
-esteem.
St
age5:I
dent
it
yvs.Rol
eDi
ff
usi
on
Aswegr ow,weexperienceconfl
ictduetothe
soci
all
yimposedrequirementofbecomi ngan
i
ndependentandeffecti
veadult
.This,atti
mes,
becomesdiff
icul
t.
I
ntheworkpl
acealso,
weareexpect
edtopr
ove
our
sel
vesashigh,
perfor
mingmembers.
Obv
iousl
y,t
hisi
snotal
way
seasyf
orev
ery
body
.
I
ntheprocesssomemayfindthei
rrol
eident
it
y
di
ff
usedrathert
hani
dent
if
iedanddist
ingui
shed.
St
age6:I
nti
macyv
s.I
sol
ati
on
Asay out
h,onefeel
stheneedt
odev
elopi
nti
mat
e
rel
ati
onshi
pwithother
s.
Joi
nCAI
IBWI
THASHOKonYouTube
Howev er,
theremaybeimpedi
ment
stodevel
op
suchrelat
ionshi
pandhencesomemightf
eel
i
solat
ed.
Samei
stheexper
iencei
nthewor
kpl
aceal
so.
Wemaydevel
opclosecontactwit
hot
her
sandwe
mayal
sof
eelasenseofisolat
ion.
St
age7:Gr
owt
hvs.St
agnat
ion
I
nmi ddl
eadul
thood,t
herearecompulsi
onst
o
for
egoone'
simmediateneedsinfav
ourof
devel
opi
ngone'schi
l
dren.
I
fthi
sisnoteff
ecti
vel
yr esol
vedwi
thi
nthe
i
ndiv
idual
,asenseofstagnati
oncr
eepsin.
Similar
ly,i
nanorgani
sati
onasonereachesmid-
career,t
herei
sanexpectati
onandneedt odev
elop
othersinthesyst
em andhelpt
hem t
ogr ow.
I
fthi
sisnotdoneproper
ly,
theper
sonsensesa
f
eeli
ngofstagnat
ion.
Joi
nCAI
IBWI
THASHOKonYouTube
St
age8:I
ntegr
it
yvs.Despai
r
Duringthelat
erpar tofli
fe,t
herei
sanat ur
aldecl
ine
ofsocialandbiologicalr
olesduetotheageing
process.Asar esultonemayexperienceasenseof
uselessness.
I
fheisinaposit
iontoacceptreal
it
y,hemay
r
esolvet
heconfl
ictandfeelhappyabouthi
s
l
if
elongachi
evements.
Likewise,i
nanorgani
sati
on, asoneapproaches
reti
rementage,hemayexper ienceeit
herahigh
senseofsel f
-wor
thduetohi spercei
ved
accompl i
shmentsint
hecar eerorhemaywi thdr
aw
himselfwithasenseofpurposelessnessand
despair.
Thetwot heori
es(TypeAandB)andErikson'
s
modelofper sonal
it
ybri
ngoutdi
ff
erentaspect
sof
theconcept.
WhileTypeAandBf ocusoncertai
npersonal
ity
feat
ures,Eri
kson’
smodelnarratesdif
fer
entstages
ofanindivi
dual'
sgrowthandtheiref
fect
sonhi s
mentalpersonal
ity
.
Joi
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ABM MODULE–C
Chapt
er22:HumanI
mpl
icat
ionsofOr
gani
sat
ions
(
PART-
IV)
Whatwewi
llst
udy
?
*
Whatar
ethedi
ff
erentPer
sonal
it
yTheor
ies?
Per
sonal
it
yTheor
y:
Therear
ecert
aincommonpatt
ernsandvar
iabl
es
whichdet
ermi
netheper
sonal
it
yofpeopl
e.
Thepatt
ernsofbehav
iourcanbe,uptosome
ext
entpredi
ctedi
fwecanidenti
fythety
peof
per
sonali
ty.
Peopl
ewi t
hsimilarat
tri
but
escanbeclassi
fiedi
n
onecategoryandthei
rbehavi
ourcanpredi
cted.
Accordingl
y,exper
tshav
edevel
opedcer
tain
personali
tyt
heory.Someofwhi
chwewilldi
scuss
her
e.
1-
Psy
cho-
anal
yti
calTheor
y(PT)2-
Trai
tTheor
y
3-
Sel
f-
ConceptTheor
y4-
Soci
alLear
ningTheor
y
Joi
nCAI
IBWI
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Psy
cho-
anal
yti
calTheor
y(PT)
:
PTisbasedpr imaril
yontheFreudi
anconceptof
unconscious,subconsci
ousandconsci
ousnatur
e
ofpersonali
ty.
Fr
eudnot
edthathispat
ient
'sbehav
iourcoul
dnot
al
waysbeexpl
ained.
Thisledtohim beli
evethattheper
sonali
ty
str
uctureispri
mar i
lyf
oundedonunconsci ous
fr
amewor kandt hathumanbehav i
ourand
mot i
vati
onaretheoutcomeofpsy choanalyt
ic
el
ement s,vi
z.,
id,t
heego, andthesuperego.
I
dist
hef
oundat
ionoft
heunconsci
ous.
I
tstr
ivesforsexualpl
easur
eandot herbi
ological
pl
easuresandhasani mali
nst
inct
sofaggr ession,
poweranddomi nati
on.
Egoisconsci
ousi
nnatur
eandrel
atesour
consci
ousurgest
otheoutsi
dewor
ld.
Itkeepst hei
dincheckthr
ought
her
eal
it
iesoft
he
externalenvi
ronment.
Whi
lei
ddemandsi
mmedi
atepl
easur
e,what
ever
Joi
nCAI
IBWI
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thecost
,egocont
rolsitsothatt
hesepl
easuresare
grant
edatanappropri
ateti
meandi nanacceptabl
e
manner.
Becauseofdi
ffi
cul
tyofkeepi
ngthei
dundercont
rol
,
egoissuppor
tedbysuperego.
Thesuperegoi
sthehigherl
evelr
estrai
ningfor
ce
andcanbedescri
bedastheconscienceofthe
per
son.
Theconsci
encecreat
esst andardsofwhatiswrong
andwhatisri
ghtandisgener al
lysubconsci
ousl
y
devel
opedbytheabsorpti
onofcul tur
alandethi
cal
val
uesofthesoci
alenvir
onment .
Allt
heset
hreeFreudi
anelementsarei
nterr
elat
ed
andeachcannotexi
stini
solat
ionfr
om others.
I
nor dertocreat
ea‘
normalpersonal
it
y’,
ther
emust
beabal anceint
her
elat
ionshi
pamongt hesethr
ee
for
ces.
Forexample,anover
devel
opedsuperegowoul d
maket heper
sonhighl
ymor alandmakehimf eel
gui
lt
yforeveryli
tt
let
hingt
hatsl i
ght
lydev
iat
esf r
om
Joi
nCAI
IBWI
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t
henor
m.
Thi
swoul
dnotbeconsi
der
edpr
act
icalorr
ati
onal
.
Si
mi l
arly
,anunder
devel
opedsuperegowoul
dleti
d
urgeslooseandwoul
dcharact
eri
setheper
sonas
onehav i
ngweakmoralsandval
ues.
Thispsy choanal
yti
calappr
oacht
oper
sonali
ty
st
r uct
ureanalysi
shasmadesomei mpacton
organisati
onalbehavi
our.
Similar
ly,suchempl oyeebehav i
ourasdaydreaming,
forgetf
ulness,absenteeism,tar
diness,
sabotage,
alcoholi
sm anddr ugabuse, canbeanalysed
throughpsy choanal
y t
icalst
udiesandanalysis.
Tr
aitTheor
y:
Traitt
heorybeli
evesthatthetrait
sofaper
son
whichdeterminehispersonal
ityandbehav
iourar
e
basical
lyi
nherenttoaperson, i
.e.
,mor
eofa
heredit
yimpactthantheenv i
ronment.
Trai
ttheoryexpl
ainspersonal
ityasa
demonstrati
onofcertai
nt r
ait
softheindi
vi
dual
.
Joi
nCAI
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Whil
etherearemanyt
rai
tscommont omost
peopl
e,ther
earemanyot
hertrai
tst
hatareunique
toapersonandar
enotsharedbyotheri
ndi
vidual
s.
OnthebasisofTrai
ttheory,
peoplecanbe
descr
ibedasaggressiv
e,loy
al,pl
easant,fl
exi
ble,
humorous,sent
imental,
impulsi
ve,coolandsoon.
Tr
ait
sarethebasicelementsofpersonal
it
yandcan
beusedt
oexplaintheirbehav
iour
.
Peopl
ebehavinginaforcef
ulmannerinmost
si
tuat
ionscouldbedescri
bedasaggressi
ve.
Si
mi l
arl
y,ifapersonall
owsother
stot
aket
he
i
nit
iati
ve,heis‘submissi
ve'
.
Sel
f-
ConceptTheor
y:
Thistheorybeli
evest
hatper
sonal
it
yandbehavi
our
aretoagr eatext
entdet
ermi
nedbythei
ndiv
idual
hi
msel f.
Wehaveanimageofourownandouract i
ons
woul
dbeconsistentwi
ththati
mage.Car
lRoger
sis
cl
osel
yassoci
atedwiththi
stheor
y.
Joi
nCAI
IBWI
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Accordi
ngtohim, t
hebestvant
agepointfor
under
standingbehavi
ouri
sfrom t
heinter
nalfr
ame
ofref
erenceoftheindi
vi
dualhi
mself
.
Ani
ndi
vi
dualhi
msel
fist
hecent
erofexper
ience.
Hi
ssel
f-
imagei
sanint
egralofhowheviews
hi
msel
fandhi
sper
cepti
onofhowot her
sv i
ewhi
m.
Thissel
f-concepti
saresultofaper
son'
s
i
nteract
ionwi t
hhisenv
ironment.
Thi
sinter
acti
oninthef
orm ofl
ear
ningexperi
ence
hel
psustogr owandmatur
e,andwemodi fyour
sel
fconceptasaresul
toft
heseexperi
ences.
Whenwegetposi ti
vefeedbackfrom othersi
n
responsetoourbehav
iour,ourself
-concepti
s
posit
ivel
yrei
nfor
ced.
Ontheotherhand,whenwegetnegati
vefeedback,
oursel
f-
regar
dislowered,
resul
ti
ngintensi
onand
anxi
ety
.
Thus,anemployeewithaself
-conceptofhi
gh
i
ntel
li
gence,
independence,
andconf i
dencemaynot
l
ookforsuchreinf
orcementtechni
quesas
Joi
nCAI
IBWI
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monetaryrewar
ds,
jobsecur
it
yordi
rect
ive
super
visi
on.
Hemaylookforachal
lengi
ngenv i
ronmentwher
e
heget
srecogni
ti
on,r
esponsibi
li
tyandachiev
ement
.
Ontheotherhand,themonetaryrewardsandjob
secur
it
ymaybemor eef
fect
iveonempl oy
eeswho
haveaself
-conceptofdependence,i
nsecuri
tyand
wholackconfi
dencei nt
hemselves.
Soci
alLear
ningTheor
y:
Thistheor
ybeli
evesthatper
sonali
tydev
elopment
i
smor earesul
tofsoci
alvar
iabl
esthanbiol
ogi
cal
fact
ors.
Muchofhumanbehaviouri
sei
therl
ear
ntor
modi
fi
edbylear
ning.
Throughlear
ning,oneacqui
resknowl
edge,
att
itudes,
val
ues,skil
ls,
etc.
Per
sonali
tyi
sthesum t
otalofal
lthataper
sonhas
l
earned.
Thesoci
all
ear
ningtheoryuses‘r
einf
orcementand
puni
shment
’approachinunderst
andingper
sonali
ty.
Joi
nCAI
IBWI
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Forexample,fr
ustrat
ioncausedbyexter
nal
envi
ronment,causesandr ei
nfor
cesaggressi
onas
apersonal
itytr
ait
.
Also,
goodbehavi
ouri
srewardedbythesoci
etyi
n
termsofprai
sewhi
chfur
therrei
nfor
cesgood
behavi
our.
Thus,behavi
ourandext
ernalenv
ironmenthav
e
mutualint
eract
ion.
Behavi
ourpart
lycr
eatestheperson'
senvi
ronment
andtheenvi
ronmentaffect
stheperson'
sbehavi
our
aswell
.
Joi
nCAI
IBWI
THASHOKonYouTube&App
ABM MODULE–C
Chapt
er22:HumanI
mpl
icat
ionsofOr
gani
sat
ions
(
PART-
V)
Whatwewi
llst
udy
?
*
Whati
smot
ivat
ion?
THEORI
ESOFMOTI
VATI
ONANDTHEI
R
PRACTI
CALI
MPLI
CATI
ONS:
Whati
sMot
ivat
ion?
Tobegi
nwi
th,
wewi
lldef
inet
het
erm mot
ivat
ion.
Thewordmoti
vati
onisder
ivedf
rom Lat
inwor
d
‘
movere'
(tomove).
Accordi
ngly
,itat
temptstoaccountfort
he‘dr
ives’
and‘wants'
ofanindivi
dualr
atherthanj
ust
focusi
ngont hei
ndiv
idual
'sacti
ons.
Theterm motiv
ationiscommonlyusedand
understoodbyeveryonebutt
her
eisnounifor
m
defi
niti
onoftheterm.
Onecanfi
ndasmanydef
ini
ti
onsasnumberof
booksont
hesubj
ect
.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Init
ssimpl estform moti
vati
oni nanorganisat
ional
contextisreferr
edast heextentofwil
li
ngnessof
anempl oyeet orespondtotheor gani
sat
ional
requir
ement s.
Motivati
onisgener
all
ydir
ected,consci
ousl
yor
unconsciousl
y,t
owardssati
sfacti
onofneeds
(moti
v es)
.
Moti
vati
onhasdi
rectimpactont
hej
ob
per
for
manceofindi
vidual
s.
Moti
vat
ioni
saprocessbegi
nni
ngfr
om innerst
ate
ofaper
sonandendingwi
thneedf
ulf
il
lment.
Forexample,whenanemployeeworkshar
d,hi
s
l
evelofmot i
vat
ionmaybeconsider
edashighand
i
fheav oi
dswor k,
hismot
ivat
ionlev
elmaybe
consi
deredaslow.
Thel
evelofmoti
vat
ionofanemployeecanbe
j
udgedbyhisact
ualworkbehav
iour
.
Themanager sar
e,therefor
e,i
nterestedinknowi
ng
thef
actorswhichmot i
vateemploy eestoworkhard
andalsothefact
orswhi chcont
ributeto“de-
moti
vation’
.
Joi
nCAI
IBWI
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Ever
yhumanbei
nghasagi
venl
evelofsat
isf
act
ion
atagiv
enpoi
ntoft
ime.
Moti
vationasabehav iour
alconcepti
sofgreat
i
nter
estt otheexecuti
vesandmanagersin
or
ganisationst
oday .
Oneoft
hebi
ggestpr
oblemsamanagerfacesi
s
howtomot
ivat
ethepeopl
ewor
kingunderhim.
Whatismoti
vat
ionandhowcanempl
oyeesbe
moti
vatedt
owor k?
Whati
stherel
ati
onshi
pbet
weenmot
ivat
ionand
per
for
mance?
Whetherahighl
ymotivat
edemployeei
snecessar
il
y
agoodperformeroremployeewhoseper
for
mance
i
snotgoodcanbeconsi der
edasde-moti
vat
ed?
Thesearesomeoft
heissueswhichar
edr
awi
ng
theat
tenti
onoft
heorgani
sat
ions.
Joi
nCAI
IBWI
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Thev
ari
oust
heor
iesofmot
ivat
ionar
e:
1.Scient
if
icManagementorRat
ionalEconomi
c
View
2.HumanRel
ati
onsModel
3.Abr
aham Masl
ow'
sNeedHi
erar
chyTheor
y
4.Fr
eder
ickHer
zber
g'sTwo-
Fact
orTheor
y
5.Cl
ayt
onAl
der
fer
'sERGTheor
y
6.Achi
evementMot
ivat
ionTheor
y
7.Vi
ctorHVr
oom'
sExpect
ancyModel
8.JamesSt
acyAdams'
Equi
tyTheor
y
9.LymanW.Port
erandEdwardELawl
er–
Perf
ormanceSat
isf
act
ionModel
10.Rei
nfor
cementTheor
y
Joi
nCAI
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6-Achi
evementMot
ivat
ionTheor
y:
Thi
stheor
ywasdev el
opedbyDav
idC.McCel
land
andhi
sassoci
ates.
Accor
dingt othi
stheor
y,t
herearet
hreeneeds,
namel
y ,needforachi
evement,
needforpowerand
needforaffi
li
ati
on.
Needf
orAchi
evement
:
Employeeswithhighachievementmoti
vat
ion
der
ivesati
sfacti
onfrom achiev
inggoal
s.
Succeedi
ngatat
aski
simpor
tantt
othem.
Alt
houghpeopl ewithahighneedf
orachi
evement
areoftenwealthy
,thei
rwealt
hcomesfrom t
hei
r
abil
it
yt oachi
evegoals.
However,
highachi
ever
sar enotmoti
vat
edby
moneyperse;moneyistheiri
ndi
cat
orof
achi
evement.
Theyprefert
oworki ndependent
lyanddisl
ikeeasy
taskswhichdonotthrowanychal l
engeora
competit
ivesi
tuat
ion.
Joi
nCAI
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Needf
orPower
:
Theemployeesexhi biti
ngt heneedforpower,
der
ivesat
isfact
ionf rom theabili
tyt
ocontrolot
her
s
andhavi
ngcont rolov erresour
ces.
Actualachi
evementofgoal
sislessimport
antto
them thant
hemeansbywhi chgoalsareachi
eved.
Indi
vi
dualswit
hahighneedf
orpowerderi
ve
sati
sfact
ionfr
om bei
ngi
nposit
ionsofi
nfl
uence
andcontrol
.
Organisati
onsthatfostert
hepowermotivetendto
attr
actindiv
idual
swi t
hahi ghneedf
orpower( f
or
exampl e,
mi l
it
ary,
civi
lservi
cesandpol
it
ical
organi
sations).

Needf
orAf
fi
li
ati
on:
I
ndiv
idualsexhi
bit
ingthi
sneedasadominant
moti
ve,deri
vesati
sfacti
onfr
om bei
ngsoci
alwit
h
i
nter
personalact
ivi
ti
es.
Theyhaveast
rongneedfori
nter
per
sonalt
iesand
togetcl
oset
opeoplepsy
chologi
cal
ly.
Joi
nCAI
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Ifaskedtochoosebetweenwor kingatat askwith
thosewhoar etechni
call
ycompet entandt hose
whoar ethei
rfri
ends,i
ndivi
dualswithhighneedf or
affi
li
ati
onwillchoosethei
rfri
ends.

7-Vr
oom'
sExpect
ancyModel
:
Thistheor
yhassev er
alnamessuchas
i
nstrumentali
tytheory,path-
goalt
heor
yandv
alence
-
instrumental
it
y-expectancytheor
y.
Thet
heor
ywasdev
elopedbyVi
ctorHVr
oom.
Theexpectancymodelisbasedonthebeli
eft
hat
motivat
ionisdeter
minedbythenat
ureofthe
rewardpeopleexpectt
ogetasaresultoft
hei
rjob
perf
ormance.
Theunder l
yingassumptioni
sthatamanisa
rat
ionalbeingandwi l
ltr
ytomaximisehi
sper
cei
ved
val
ueofsuchr ewards.
Hewi
llchooseanal
ternat
ivet
hatwoul
dgi
vehi
m
t
hemaximum benef
it.
Joi
nCAI
IBWI
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Peoplearehi
ghlymotivatediftheybel
ievethata
cert
ainty
peofbehav i
ourwi l
lleadtoacertaintype
ofoutcomeandt hei
rextentofpersonalprefer
ence
fort
hattypeofoutcome.
Ther
ear
ethr
eei
mpor
tantel
ement
sint
hemodel
.
Thesear
e:
1-
Expect
ancy
:
Thisisaper son'
sper
ceptionoftheli
kel
ihoodthata
parti
cularoutcomewil
lresultf
rom apar
t i
cul
ar
behaviouroracti
on.
Thisli
kel
ihoodisprobabi
li
sti
cinnat
ureand
descri
bestherelat
ionshi
pbetweenanactandi
ts
outcome.
Forexampl e,
ifastudentworkshardduri
ngthe
semester,hewi l
lexpectt
odowel li
nthefi
nal
examinati
ont houghhecannotbehundredpercent
cert
ain.
Ther
eissomepr
obabi
li
tyat
tachedt
othi
sout
come.
Joi
nCAI
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2-
Inst
rument
ali
ty:
Thisfactorrelatestoaper
son'
sbel
iefand
expectati
ont hathisper
for
mancewilll
eadtoa
parti
culardesiredrewar
d.
I
tisthedegr
eeofassociat
ionoff
ir
stlev
eloutcome
ofapart
icul
areff
ortt
othesecondlev
eloutcome
whichi
stheult
imaterewar
d.
Forexample,wor
kinghardmayl eadtobet t
er
perfor
mance–whi chi
st hefi
rst
-lev
eloutcome, and
i
tmayr esulti
narewardsuchassal ar
yincreaseor
promotionorbot
h–whi chisthesecond-level
outcome.
Ifapersonbeli
ev esthathi
shighperf
ormancewil
l
notber ecogni
sedorl eadt
oexpectedanddesi
red
rewards,hewillnotbemotivat
edtoworkhard.
Theinst
rument
ali
tyi
stheper
for
mance-
rewar
d
rel
ati
onshi
p.
Joi
nCAI
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3-
Val
ence:
Valenceist
hev
alueaper
sonassi
gnst
ohi
sdesi
red
reward.
Hemaynotbewil
li
ngtoworkhardt
oimpr
ove
per
for
mancei
ftherewar
dforsuchi
mprov
ed
per
for
mancei
snotwhathedesir
es.
I
tisnottheactualv
alueofther
ewardbutt
he
per
ceptualval
ueoftherewardi
nthemindoft
he
per
sont hati
simportant
.
Anemployeemaybemotiv
atedtowor
khardnott
o
getpayr
aisebutt
ogetr
ecogni
ti
onandst
atus.
Anotheremployeemaybemor
eint
erest
edi
njob
securi
tythanst
atus.
Joi
nCAI
IBWI
THASHOKonYouTube&App
ABM MODULE–C
Chapt
er22:HumanI
mpli
cati
onsofOr
gani
sat
ions
(
PART-VI
)
Whatwewi
llst
udy
?
*
Whati
sMasl
ow’
stheor
yofhi
erar
chyofneed?

Masl
ow'
sHi
erar
chyofNeeds:
Abraham Maslow,acl
ini
calPsy
chologistf
rom USA
submitt
edthatpeopl
ehav et
hefol
lowing5basic
l
evelsofneeds.

Hei
dent
if
ied5needsi
nanor
derofhi
erar
chy
:
1-
Phy
siol
ogi
calNeeds,
2-
Saf
ety
/Secur
it
yNeeds,
3-
Soci
alNeeds,
4-
Sel
f-
est
eem Needs,
5-
Sel
f-
act
ual
isat
ionNeeds.
Joi
nCAI
IBWI
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Thepr omi
nenceoftheseneedsgenerall
yfoll
owa
hi
erarchyi
.e.whenaneedissati
sfiedthenonlythe
nextneedbecomespr omi
nentinthathier
archal
order
.
Buttherehavebeenf oundexcepti
onst othi
sorder
forcert
ainpersons.Theyarepreparedtosacri
fi
cea
l
oweror derneedforachiev
ingahi gherneed.

1-
Phy
siol
ogi
calNeeds:
Thisgroupofneedincludestheneedsforfood,
dri
nk,shel
ter
,oxygen,sleep,
sex,weather
,etc.
Thesephysiol
ogicalneedsar
erequi
redt
omai
ntai
n
thephy
sicalenti
tyoftheindi
vi
dual
.
Thesearet
hebasi
cneedsinthesensethatthey
sat
isfyt
hever
yli
vel
ihoodoft
heindi
vidualf
or
surv
ival
.
Physi
ologicalneedsdomi
nat ehumandesiresand
onl
ywhent heseneedsar
er easonabl
ysat
isfi
ed,
one'
sattentionturnst
ootherneeds.
Joi
nCAI
IBWI
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Intheorganisati
onalcontext,
phy si
ologi
calneeds
arerepresentedbytheempl oyee'
sconcer nfor
salar
iesandgoodphy si
calwor ki
ngconditi
ons.
Theorgani
sat
ionshouldtheref
oreendeavourto
sat
isf
ythephysi
ologi
calneedsoftheempl oyee.
Onl
ythentheywil
lbemot iv
atedtoperfor
m better
.
2-
Saf
ety
/Secur
it
yNeeds:
Saf
etyneedsbecomemotiv
ator
saf
ter
phy
siol
ogicalneedsar
emet.
Maslowsuggestedthatthesafetyneedsaremost
readi
lyobser
vedininfant
sandy oungchil
dren
becauseofthei
rrel
ativehel
plessnessand
dependenceonadults.
Safetyandsecuri
tyneedsi ntheor gani
sat
ional
contextrel
atetosuchf actor
sasj obsecur
ity,sal
ary
i
ncreases,safewor ki
ngconditi
ons, uni
oni
sati
on,
andlobby i
ngforprotecti
velegi
slation.
Manager
ialpracticestosatisf
ythesaf
etyneedsof
t
heemployeei ncludepensionscheme,group
i
nsur
ance,prov i
dentfund,gratui
ty,
saf
ewor ki
ng
Joi
nCAI
IBWI
THASHOKonYouTube&App
condi
ti
ons,
gri
evancepr
ocedur
e,et
c.
Arbitrar
yorunpr edictabl
eact ions,whi chcreat
ea
feeli
ngofuncer tai
nt y(parti
cularl
yr egardi
ng
cont i
nuedempl oyment ),favourit
ism, or
discri
mi nat
ionont hepar tofthemanagementdo
notcr eateafeeli
ngofsecur it
yint heempl oyee'
s
mi nd.

3-
Soci
alNeeds:
Thi
sneedi
sexpr
essedthr
ought
hedesir
eto
bel
ongi
ngandaf
fect
ioni
nasoci
alcont
ext.
I
nt heor ganisat
ionalcontext
,socialneeds
representtheneedf oracompat ibleworkgroup,
peeraccept ance,professi
onalfr
iendship,
and
fri
endlysuper vi
sion.
Thesearet
heneedsoneacqui
res,l
ear
nsoradopt
s
thr
oughexperi
enceandt
heseneedsaremost
ly
cul
tur
all
ydeter
mined.
Theyar
elar
gel
yamani f
est
ati
onofthedesi
ret
o
bel
ongandbeaccept
edbyother
s.
Joi
nCAI
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Manager swoulddowel lt
oencouragei nformal
groupsamongstt heemployeessot hatthisneedi
s
adequatelymet.Careshouldbetakent hatthe
i
nformalgr oupsshoul
dnotwor kcontrarytothe
requi
rement softheor
ganisati
on.
Maybe, i
fwor ker
shavethefreedom tof or
mt heir
ownwor kteamsanddeci deupont hedistr
ibuti
on
ofwor kwi
thintheteamsandt othateffectorgani
se
theteam,onemaybeabl etoseeapr oducti
ve
outcome.
4-Sel
f-
est
eem-
Needs:
Theesteem needsforself
-respectandrecogni
ti
on
andforrespectofother
sareof tenref
err
edt oas
egoorstatusneeds.
Thesati
sfact
ionoft
hisneedgener
atesafeel
ingof
sel
f-
confi
denceandofbeingusef
ulandnecessar
y
i
nthewor l
d.
Incontr
ast,thethwarti
ngofthi
sneedl eadstoa
feeli
ngofinfer
iori
ty,
inept
ness,weakness,and
helpl
essness.
Joi
nCAI
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Maslowemphasisedthatthehealt
hiestsel
f-est
eem
i
sbasedonearnedrespectfrom othersrat
herthan
onfame,st
atusoradulat
ion(prai
se).
Inthecontextofworkpl
ace,self
-esteem needs
correspondtojobti
tl
e,merit
,payincrease,peer/
supervisor
yrecogni
ti
on,chall
engingwor k,
responsibi
li
ty,
etc.
Manager i
alpr
acti
cestofulfi
lltheseneedsi ncl
ude
chall
engingworkassi
gnment s,perf
ormance
feedback,per
for
mancer ecogni t
ion,personal
encouragementandinvolvi
ngempl oyeesingoal
setti
nganddecisi
on-making.
5-Sel
f-
Act
ual
isat
ionNeeds:
Inanorgani
sati
on,self
-act
ualisati
onneeds
corr
elat
etothedesireforexcell
inginone'
sjob,
advanci
nganimpor t
antidea,successful
ly
managingtheunit
.
Thisl
evelofneedsencompassestheabi
li
tyto
accompli
shandachievesomethingi
nli
fe,i
.e.t
o
maximiseone'
spotenti
alandthedesi
retobecome
whatoneiscapableofbecoming.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Bybeingawareoft heself
-actual
isat
ionneedsof
subordinat
es,managerscanuseav ari
etyof
approachestoenablethem toachievethei
r
personalaswellastheorganisat
ionalgoal
s.
Theworker
swhooper at
eatsel
f-
actual
isat
ionneed
dopr
eferautonomyanddonotrequi
resupervi
sion.

Dr
awbacksofMasl
ow’
sTheor
y:
WhileMasl ow'sneedsclassif
icat i
ontheorymakes
goodsense, problemsar i
sewithhi scontent
ionthat
theyarearrangedi nahierar
chicalfashionandthat
thelowerlevelneedsmustbef irstsati
sfi
edbefore
thehigherlevelneedsinthepy rami dwil
lbe
acti
vated.
Takef orinstancet hecaseofteachers,poets,
arti
stsandmusi ciansallovert
hewor ldwhohav e
tr
iedtosel f-
actualisethemselvesbytheiri
mmor tal
workwi thoutev erhavingsati
sfiedt
heirlowerlev
el
needs.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Thus,i
tispossi
blef
orsomeatleast
,nott
ogo
thr
ougheveryst
epinthehi
erar
chy.
Anot
herproblem wit
hMaslow'
st heoryi
sthe
oper
ati
onali
sationofsomeofhisconceptswhich
makeitdi
ffi
cultforr
esear
cher
st otesthi
stheory
.
Fori
nstance,
howdoesonemeasur
esel
f-
act
uali
sati
on?
Despi
tethepr
oblemsthet
heoryhasusef
ul
pr
acti
calimpl
icat
ionsf
ormanager
s.
Iti
saf actthatthev astmaj ori
tyofemployees
j
oiningorganisati
onatl owerlevel
s,arebyandlarge,
seekingtosatisfytheirphysiologi
calneedsfi
rst
andt henmov eupt hel evel
sst epbystep.
Itt
husoffer
sagoodconceptualschemef or
managerstounder
standanddealwi t
hissuesof
employ
eemot i
vati
onattheworkplace.
Joi
nCAI
IBWI
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ABM MODULE–C
Chapt
er23:Employees’
FeedbackandRewar
d
Sy
stem (PART-I
)
Whatwewi
llst
udy
?
*
Whati
sEmpl
oyee’
sFeedback?
EMPLOYEES'
FEEDBACK:
Sati
sfacti
onofemployeesatworkpl
aceis
consi
deredasani mport
antpar
amet erf
or
achi
ev i
ngorgani
sati
onalobj
ect
ives.
Progressi
veor gani
sati
onsalway strytogetthe
regul
arfeedbackf r
om theempl oyeesonv ar
ious
humanr esourcemanagementaspect s,andnew
i
niti
ativ
estakeni nthi
sregardthroughsome
sati
sfacti
onorcl i
matesurveys.
Thei
nformati
onisgat
heredbot
hfor
mallyand
i
nfor
mallyaboutt
heatt
it
udeandsat
isf
acti
onof
employ
ees.
Thisi
nformati
onisusedforref
ini
ngandf
inet
uni
ng
thepol
icyini
ti
ati
vesf
rom ti
met oti
me.
Joi
nCAI
IBWI
THASHOKonYouTube
Atformall
ev eltheinf
ormati
onandf eedbackis
gather
edthroughwel ldesi
gnedquestionnai
res,
psychol
ogicalinstr
uments,suggest
ionschemes,
etc.
Thei nformalinf
ormati
onisalsogatheredt
hrough
discussionswi t
htheemployeerepr
esentat
ives,
obser v
ationsofmanagersandsuper i
orsbasedon
thebehav iourpatt
ernoft
heempl oy
ees.
Vit
alinformati
oncanal sobegat heredwhile
conductingappraisali
ntervi
ewsandal sothrough
exi
tintervi
ewsofempl oy eespar
ticular
lyt
hosewho
l
eavet heorganisati
onunexpectedly.
Thesei
nter
viewsprovi
deusef ulcl
uest othe
managementtounderstandt heexpect at
ionsofthe
employ
eesandtof i
netunet heper sonnelpoli
cies
andhumanresourcedevelopmenti ni
ti
ati
ves.
Manyor ganisat
ionsareatt
empti
ngtousecli
mate
surveydataandper f
ormancedatatomeasureand
evaluatethequali
tyofthei
rmanagementofhuman
resources.
Joi
nCAI
IBWI
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ResearchconductedbySchusterbasedonasurvey
cal
ledHumanResour ceIndex(HRI)prov
idessome
i
nsightint
ocurrentHRM pract
ices.
Whensev eralt
housandempl oyeesinacross
secti
onof28di verseorganisationsweresurv
ey ed
for15f actorsi
nt hei
rwor ksituati
ons,t
heystrongly
expressedt hatt
heywer eleastsat i
sfi
edwiththe
opportuniti
estheyhadt opar ti
cipatei
nthedecision
-makingoft heorganisati
on.
Theyal
sovoicedthattheydi
dnotgetenough
i
nformat
ionaboutbusinessobj
ect
ives,
goals,
and
pl
ansoftheorganisat
ion.
Theemployeeswerealsorel
ati
vel
ydi
ssati
sfi
ed
wit
hthei
rrewardsystemsandthei
rdi
str
ibuti
on
wit
hint
heirorgani
sat
ion.
Perhapsthemostimportantconcl
usionthatcanbe
drawnfrom suchsur
veysisthathowef f
ecti
velyan
organi
sati
onismanagingitspeople.
Moreover,
thesurveydatahavepr
ovedhelpfuli
n
di
agnosingspecif
icprobl
emsandinini
ti
ating
or
ganisati
onaldevel
opmentini
ti
ati
vesbyopening
Joi
nCAI
IBWI
THASHOKonYouTube
uptwo-waycommuni cat
ionaboutmatter
sof
pr
acticalsi
gni
fi
cancetotheorgani
sat
ionandi
ts
employees.
FeedbackThr
oughCl
imat
eSur
vey
s:
Cl
imatesur
veysaremostpopul
arandpr
evalent
meanstogatherf
eedbackf
rom t
heemploy
ees.
Ifdesi
gnedpr operl
y,thesesur
veyscanprov
idev
ery
usefulinf
ormationandcl uest
othemanagement
foreffect
ivehumanr esourcemanagement.
Organisationsusedt
omeasuri
ng“employ
ees’
perceptionsofthepr
evai
li
ngcl
imatei
nan
organisati
onarecall
edcl
imat
esurvey
s”.
Althoughcli
matei
susuallymeasur edforthe
organisat
ionasawhole,scor esaret y
picall
y
analyseddepar
tment/di
visionwi sesot hatthe
managementcanassesst heclimat eindiff
erent
unitsandcomparethem wi thotherunits.
TheHumanResour cesDevel
opment/Management
depar
tmentordinar
il
ycoordi
nat
estheenti
re
exer
cise,
from desi
gni
ngthequest
ionnai
reto
Joi
nCAI
IBWI
THASHOKonYouTube
admi nister
ingthequest i
onnai
reandtabul
ati
ngand
present i
ngt heresul
ts.Theassi
stanceofl
ine
manager sisalsosoughtinadminist
eri
ngthe
quest i
onnaire.
Theresultsofthesurveyarepresent
edtothetop
managementbyt heHRDepar t
mentandt hevi
ewof
thedepartmentalheads/uni
theadsareobtai
nedto
analy
set heposit
ionandf i
ndi
ngoutv i
abl
e
solut
ionsforimprovement.
Althoughthecont
entofthecl
imatesurvey
smay
varyfrom or
gani
sati
ontotheorgani
zati
onbasedon
thenat ur
eofbusi
nessandotherdif
fer
enti
ati
ng
factors.
Thecov
erageofat
ypi
calsur
veycanbeasf
oll
ows:
1.Structur
e:Thefeel
ingthatemploy
eeshav eabout
theconst r
aint
sonthegroups,rul
es,r
egulat
ions,
procedures,communicat
ionschannels(
layersin
decisionmaking)
,del
egationandauthor
ity,
etc.
2.Responsi
bil
it
y:Thefeeli
ngofbei ngyourown
boss,cl
ari
tyofroleandresponsibi
li
tyvis-
à-v
is
superi
or,
subordinat
esandpeer s,etc.
Joi
nCAI
IBWI
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3.Rewar
d:Thef eel
ingofbei
ngrewardedf
orajob
donewel
l,percepti
onaboutr
ewardandpunishment
syst
em,percepti
onaboutpayandpromoti
on,etc.
4.Risk:Thesenseofriskinessandchal l
engei
n
thej
obandi ntheorganisation,andanyemphasis
ontakingcalcul
atedri
sk( ri
skt akingi
sencour
aged
andbonaf ideer
rorsarepr otected)orpl
ayi
ngsafe
i
sencour agedandaccept ed.
5.Warmt h:Thegener
alf
eeli
ngoffell
owshipt
hat
prev
ail
sint heworkgr
oupatmosphere,the
prev
alenceofinfor
malsupport
ingcult
ureand
soci
algroups.
6.Support
:Theper cept
ionabouthelpf
ulnessof
managersandot heremployeesinthegroup,
emphasisonmut ualsupportfr
om aboveandbelow
i
nt hehi
erarchy
.
7.Standar ds:Thepercei
vedimportanceofimpli
cit
andexplicitgoalsandperformancestandards,
the
emphasisondoi ngagoodj ob,t
hechallenge
repr
esent edinpersonalandgroupgoals.
Joi
nCAI
IBWI
THASHOKonYouTube
8.Confli
ct:Thefeelingthatthemanagersandot
her
workerswantt oheardi f
f er
entopini
ons,
the
processofconf l
ictresoluti
on,opport
uni
tyt
o
expresstheviews, etc.
9.Identi
ty:Thef
eel
ingofbelongingt
othe
organisat
ionandpercei
vedvalueint
he
organisat
ionandworkgroup,etc.
Thesur v
eyshouldbeconduct edfrom ti
met oti
me
atreasonabl
einter
valstoanalysetrendsinthe
mat t
ersofatt
it
ude,expect
ations,sati
sfacti
on,and
fr
ustrat
ions,
ifany.
Thesurveymaybecompl etedutil
isingvari
etyof
i
nstruments,bot
hstandard(al
readyav ai
labl
ein
publ
ishedform)and/orcustom-t
ailoredtoa
part
icul
arorgani
sat
ion.
Theconsequencesofunf avorableclimate
characterist
icsincl
udeusingjobt i
met oconferwi
th
peersinor dertocope,hi
ghst ress,l
ookingfor
anotherjob, consi
deri
ngreportingsick,
reduced
communi cationwit
hsuperior
sandconsi der
ablej
ob
dissat
isfaction.
Joi
nCAI
IBWI
THASHOKonYouTube
Incontrast,t
heli
kel
yadv antagesoff avorablecl
imate
charact
er i
sti
csareopenpr oblem solvi
ng, l
oyal
ty,
cooperation,amongpeersandacr ossgr oups,enhanced
motivati
onandsat i
sfact
ion,andhi gh-quali
tycustomer
servi
ce.
Wecanal soi
nfert
hatthetopmanagementint
hebanks
wit
ht hehelpofHRDdepar t
mentshoul
dformul
atea
consciousstr
ategytocreat
eandmaintai
nthef
avour
abl
e
cl
imat e.
Therear emanypr osandconsr egar
dingempl oyee
survey,andifsomebankdeci destoconductsuchsur v
ey,
helpofsomeexper tmaybetakenespeci al
lyindesi
gni
ng
thequest i
onnai
re,sel
ecti
onofsampl erespondents,
i
nterpretat
ionofresult
sanddeci di
ngstrategyto
overcomesomegenui neproblems.
Ifthesurveyisnotdonescienti
fical
lyandtheemploy
ees
arenotpreparedt ovoi
cetheirgenuineopini
onina
construct
iveway ,empl
oyeesur veycancreatemor
e
problemst hantheycansolve.
Iti
salwaysdesir
abletocommuni
catether
esul
tsoft
he
surveyt
otheempl oyees–maybeinasummarisedf
orm
otherwi
seitwi
llcreat
emoreconf
usion.
Joi
nCAI
IBWI
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ABM MODULE–C
Chapt
er23:Empl
oyee’sFeedbackandRewar
d
System
(
PART-
II
)
Whatwewi
llst
udy
?
*
Whati
sRewar
dandCompensat
ionSy
stem?

REWARDANDCOMPENSATI
ONSYSTEM:
Thepri
memotiv
eofapersont
otakeupaj
obi
sto
meethi
sbasi
cneedsf
ir
st.
Thebasi
cneedsar
eadequatel
ymetbyt
hewages
heget
sforhi
scontr
ibut
iont
otheor
gani
sat
ion.
Thewagesi
ntheform ofcompensati
onisviewed
asthemai
natt
ract
iontojoinorchangeajob.
Thecompensati
onshouldbereasonabl
eand
j
usti
fi
abl
etokeeptheemployeehappyand
committ
edtotheorgani
sati
on.
Thereshoul
dalsobeani
nbui
ltr
ewar
dsy
stem f
or
bett
erperf
ormance.
Joi
nCAI
IBWI
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Thus,thebasicgoalofanindi
viduali
nan
organisat
ionist
oearnsati
sfactorywagesor
compensat i
onandperfor
m welltober ecognised
forotherfi
nanci
alandnon-fi
nancialr
ewar ds.
Thesal
aryandwagestr
uctur
eofanyorganisat
ion
i
sanimportantpar
tofi
tsper
sonnelpol
icy
.
Iti
snecessaryt
hatt
heeff
ort
soft
heempl
oyeesar
e
adequat
elycompensat
ed.
I
fthecompensat ionisdisproporti
onatetot
hetype
ofworkandt heindustr
yt r
end, ei
thert
hecompany
wil
lat
tractonlyapoorqual i
tyofempl oyeeort
here
wil
lbeav eryhightur
nov errati
o.
Thecompensat
ionshoul
dnotbesomeagerthat
employ
eesdonotfeelmoti
vat
edtoputi
nthei
rbest
.
I
nsuchcasesallgoodemploy
eeswil
lleav
eandt
he
organi
sat
ionwi
llbelef
tonl
ywithmedi
ocre
perfor
mers.
Toohighalevelofcompensat
ionmayal
sopr
ovet
o
becounter
-pr
oductive.
Joi
nCAI
IBWI
THASHOKonYouTube
Ideall
y,thecompensat ionshoul
dbesuchthatit
continuallyat
tract
st alent,
iti
samajorsourceof
retenti
onoft heexistingmanpowerandhasan
edgewhi chmot i
vatest hem t
ogivet
hei
rbest.
Thisi
s,howev
er,
asor
tofov
ersi
mpl
if
icat
ionoft
he
si
tuat
ion.
Atthi
sstagel
etusnotet
hatther
earedi
ff
erent
motiv
ati
ngfact
orsandcompensati
oni
soneof
them.
Wewi l
lseehowt hecompensati
ongetsdecided,
t
heori
esandphilosophi
esbehindit
,andother
r
elat
edissues.

TOTALREWARDS:
“TotalRewards”isdescribedastheful
l
combi nati
onofmonet aryandnon-monetar
y
i
nv estmentstheymakei nt hei
rwor
kforcet
oatt
ract,
ret
ainandengaget hepeopl et
heyneedtooper
ate
i
tsbusi nesssuccessful
ly.
Joi
nCAI
IBWI
THASHOKonYouTube
TotalRewar
ds,whi
chconsi st
softhefoundat
ional
rewards,
perf
ormance-based,andcar
eerand
envir
onmentalr
ewards.
Foundati
onalr
ewar
dsincl
udethebasesal
ary
,
heal
thcare,
ret
ir
ementandi
nsurance;
per
formance-basedrewardsaddupasshortt
erm
andlongter
mi ncenti
ves,
anyprofi
tshar
ingpl
ans
andrecogni
ti
on, andfi
nal
ly
career&envir
onment alrewardsi ncl
udecareer
developmentprograms, ment ori
ngprograms,t
alent
mobi l
it
yopportunit
ies,wel l
-beingprogr
amsand
fl
exibil
it
yinworkingar rangement s.
TheWorl
datWorkTotalRewar
dsModel
demonst
rat
esthedynamicrel
ati
onshi
pbet
ween
empl
oyersandemployees.
Ori
ginallyintr
oducedin2000, i
thasev ol
vedt o
depictthest r
ategi
celement softheempl oyer
-
empl oyeeexchangeaswel last oreflecthow
externalinfl
uencesandani ncreasinglyglobal
businessenv ir
onmentaffectattracti
on, motiv
ati
on,
ret
ent i
onandengagement .
Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube
Thesixel
ementsoft ot
alr
ewardsthatcoll
ecti
vel
y
def
ineanorganizat
ion'
sst
rat
egyt oatt
ract,
motiv
ate,
retai
nandengageempl oyeesare:
Compensat ion:Payprovi
dedbyanempl oyertoi
ts
employ eesforservi
cesrender
ed(i
.e.
,ti
me, ef
for
t,
ski
ll
).Thisincludesbothfi
xedandvari
ablepayti
ed
toperformancel ev
els.
Benefits:Progr
amsanempl oyerusesto
supplementt hecashcompensat ionemployees
receive.Thesehealt
hinsurance,i
ncomepr otect
ion,
savingsandr eti
rementprogramspr ov
idesecuri
ty
forempl oyeesandtheirf
ami l
ies.
Wor k-
LifeEffect
iveness:Aspecifi
csetof
organizati
onalpracti
ces,poli
ciesandprogr
ams,
pl
usaphi l
osophyt hatact
ivel
ysupportseff
ortsto
helpempl oyeesachievesuccessatbothwor kand
home.
Recogniti
on:Eitherformalorinformalprograms
thatacknowledgeorgi vespecialatt
enti
ont o
employeeact i
ons, ef
fort
s,behav i
ororperformance
andsuppor tbusinessstrat
egybyr einf
orcing
Joi
nCAI
IBWI
THASHOKonYouTube
behavior
s( e.
g.,
extr
aor
dinar
yaccompl i
shment
s)
thatcontr
ibutetoor
gani
zati
onalsuccess.
Perfor
manceManagement :Thealignmentof
organi
zati
onal,
team andindivi
dualeffor
tst
owar
d
theachiev
ementofbusinessgoal sand
organi
zati
onalsuccess.
Perfor
mancemanagementi ncl
udesestabli
shi
ng
expectat
ions,
ski
lldemonstr
ati
on,assessment
,
feedbackandconti
nuousimprovement.
TalentDevelopment:Pr
ovi
dest heopportuni
tyand
toolsforemployeestoadvancetheirski
ll
sand
compet enci
esinboththei
rshort-andlong-t
erm
careers.
Researchshowst hatmanyTotalRewards
progr
amsdonotachi ev
ethei
robject
ives,not
becausetheyarebadlydesi
gned,butbecausethey
arepoorl
ydeli
vered.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er23:Empl
oyee’sFeedbackandRewar
d
System
(
PART-
II
I)
Whatwewi
llst
udy
?
*
Whati
sRewar
dSt
rat
egy
?

REWARDSTRATEGY:
Armstr
ong&Mur li
s(RewardManagement,5t
h
edi
ti
on,2007)descr
ibedthei
mportanceofdi
rect
ion
asanelementinarewardstr
ategy
:
“Rewar dstrat
egydeterminesthedirecti
oninwhich
rewar dmanagementi nnovati
onsand
dev elopmentsshouldgotosuppor tthebusi
ness
strategy,howtheyshouldbeintegrated,t
hepri
orit
y
thatshoul dbegiventoini
ti
ati
vesandt hepaceat
whi chtheyshouldbeimplement ed.
”
Joi
nCAI
IBWI
THASHOKonYouTube
Pur
posef
orPr
imar
yRewar
dPr
ogr
am:
Thepurposestat
ementcanbedevel
opedby
answer
ingthesethr
eequest
ions:
Whydoeseachpr
ogr
am exi
st?
Whyi
sitmeani
ngf
ult
oyourempl
oyees?
Howdoesi
tgi
vet
heor
gani
zat
ionacompet
it
ive
adv
ant
age?
Dev
elopi
ngar
ewar
dsst
rat
egy
:
Whil
edevelopingaRewar
dSt r
ategy
,TotalRewar
ds
componentshav et
wocri
ti
cali
denti
fyi
ng
char
act
erist
ics:
1.Program:Tobeconsi
der
edpartofTot
alRewards,
thecomponentmustconsi
stofaspeci
fi
cprogr
am
thatthecompanymakesaninv
estmenti
nand
manages.
2.Value:Tobeconsider
edpartofTot
alRewards,
thecomponentmusthav esomespecif
icval
uein
theeyesofemployees.
Joi
nCAI
IBWI
THASHOKonYouTube
Desi
gnofat
otalr
ewar
dsst
rat
egy
:
1.Thecont
extf
ort
het
otalr
ewar
dsPhi
losophyof
Google:
“Ouremploy
ees,whohavenamedt
hemsel
ves
Googler
s,ar
eeveryt
hing.
Googleisorganizedaroundtheabi
li
tytoat
tractand
l
everagethetalentofexcept
ionalt
echnol
ogistsand
busi
nesspeopl e.
Inl
inewit
hthatphil
osophy
,wehavedesignedour
compensati
onprogramstosuppor
tthr
eemai n
goals:
*
Att
ractandr
etai
nthewor
ld'
sbestt
alent
.
*Suppor
tGoogle'
scul
tur
eofi
nnov
ati
onand
perf
ormance.
*
Ali
gnempl
oyeesandst
ockhol
der
s’i
nter
est
s.
“WepayGoogl
erscompeti
ti
vel
ycompar
edtoot
her
oppor
tuni
ti
est
heymighthavei
nthemarket
.
Joi
nCAI
IBWI
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Wealsoof fercompet it
ivebenefi
tst hathel
p
Googlersandt heirfamil
iesbeheal t
hyandhappy,
andprov i
deuni queperksthatmakel i
feandwork
moreconv enient ,
desi
gncompel lingjob
opportuni
tiesalignedwithourmi ssion,andcr
eat
ea
funandener gizingworkenvironment .
Wehaveadeepl
yroot
edbel
iev
einpay
ingf
or
per
for
mance.

2.St
atementofr
ewar
dphi
losophyofWhol
eFoods
Market
:
“Ourcompensat i
onandbenef i
tprogr
amsr efl
ect
ourphilosophyofegali
tar
iani
sm (t
hedoctri
nethat
allpeopleareequalanddeserveequalr
ightsand
opportunit
ies)
.
Whilet heprogramsandindiv
idualpaylevel
swi ll
al
way sr ef
lectdif
fer
encesinjobresponsibi
li
ti
es,
geographiesandmar ketpl
aceconsiderat
ions,the
overallstr
uctureofcompensationandbenefit
programsshoul dbebroadlysimil
aracrossthe
organizati
on.
Joi
nCAI
IBWI
THASHOKonYouTube
“Thepr i
mar yobjectiveofourcompensat ion
programs, incl
udingourexecut ivecompensati
on
program, i
st oattractandr etai
noverthelongter
m,
quali
fiedandener get i
cteam member swhoare
enthusiasti
caboutourmi ssi
onandcul t
ure,
provi
dingt hem withsuf f
icienti
ncomeandot her
benefitstokeept hem focusedont heCompanyas
thei
rempl oy er
.

Afurt
herobj
ecti
veofourcompensat
ionprogr
ams
i
storewardeachofourteam membersf
ortheir
cont
ri
buti
ontotheCompany .
Final
ly
,weendeavortoensur
ethatour
compensati
onprogramsareperceiv
edas
fundament
all
yfai
rtoallst
akeholder
s.
3.Employ
eeRecogni
ti
on:5Key
sfr
om TajHot
els
Resor
ts:
TajHotelsResor t
sandPalacesoperates93luxur
y
hotelsacrossIndiaand16otherhotel
sinother
partsofthewor l
dwi t
hsomanyl ocati
ons,andover
13,
000empl oy
ees,
Joi
nCAI
IBWI
THASHOKonYouTube
1-“
theTajGr
oupcreatedaSpecialThanksand
Recogni
ti
onSyst
em (STARS)thatli
nkscustomer
deli
ghtt
oemployeerewards.
"
2-“
expressi
onsofgrat
it
ude,seni
orexecutiv
esfind,
mustcomef rom i
mmediatesupervi
sors,whoare
centr
alindeter
mini
nghowempl oyeesfeelabout
thecompany .
"
3-"employeesaccumul atepointsthr
oughoutt he
yeari
nt hreedomai ns:complimentsfrom guests,
compliment sfrom col
leagues,andtheirown
suggestions.”
4-“
Cruci
all
y,att
heendofeachday
,aSTARS
commi t
tee.
..
rev
iewal
lthenomi
nati
onsand
suggesti
ons.
5-“
theti
mingoftherecogni
ti
onisusual
lymor
e
i
mportantt
hantherewardit
self
.”
Joi
nCAI
IBWI
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TypesofCompensations:Letusf
ir
stunder
stand
what'compensat
ion'
means.
I
tmaybedef inedasmoneyorremunerat
ion
recei
vedfort
heperfor
manceofworkplustheki
nds
ofbenefi
tspr
ov i
dedbytheor
gani
sati
on.
I
fthesebenef
it
sarequanti
fi
abl
eint
ermsofmoney
t
heygetadded.Compensati
oni
sexpressedi
n
t
ermsofmoney .
Itwouldthusinclude:wagesorsalar
y,bonus, cash
all
owancesandbenef i
tssuchasaccident,health
i
nsur ancecover,
empl oyer'
scont
ri
butiontothe
ret
irementfunds, pr
ovisi
onofaccommodat i
on,etc.
Thejobsar
ebroadl
ycl
assi
fi
edi
nfourgr
oupsand
thecompensat
ionf
ort
hem i
scommonlyref
err
edto
asshownbelow:
1-
Manager
ial(
top,
middl
e,j
uni
or)
=remuner
ati
on
2-
Super
visor
y=sal
ary
3-
Cler
icalorAdmi
nist
rat
ive=sal
ary
4-
Unski
ll
ed,
semi
-ski
ll
ed,
ski
ll
edandhi
ghl
yski
ll
ed
=wages
Joi
nCAI
IBWI
THASHOKonYouTube
Thewordsr emunerati
on,sal
aryandwagesare
gener
all
yusedi nter
changeabl
yindif
fer
entcont
ext
andform partofcompensati
on.
Thecompensati
oncanal
sobegr
oupedbyt
he
methodofpayment
.
Compensationcouldbepay abl
etoani ndivi
dualfor
hiscont
ri
bution,t
oat eam oragroupf orcert
ain
measurabl
er esul
ts,
acer t
ainfi
xedcomponent
everymonthandav ariabl
eporti
onrelateddirect
ly
totheperf
ormanceofani ndivi
dualoroft heteam.
Joi
nCAI
IBWI
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ABM MODULE–C
Chapt
er23:Employee’
sFeedbackandRewar
d
System (
PART-IV)
Whatwewi
llst
udy
?
*
Whatar
ecompensat
iont
heor
ies?
Compensat
ionBase:
Compensati
onpoli
cyi
sani
mpor
tantel
ementi
n
per
sonnelmanagement
.
Whatisthebasi
sorfact
orsonwhi
ch
compensati
ongetsdeci
ded?
I
tcoul
dbe:
1-
Companyobj
ect
ives
2-
Mar
ketsi
tuat
ionorpr
evai
li
ngmar
ketr
ate
3-
Int
ernalandext
ernalpr
essur
es.
Companyobject
iveist
hemai
nbasi
sonwhi
cht
he
l
evelofcompensati
onget
sdet
ermi
ned.
Ther
earecert
aincompani
eswhi
chaimt obethe
hi
ghestpaymaster
sandtr
ytoat
tractpeopl
e.
Joi
nCAI
IBWI
THASHOKonYouTube
Thecompanyphil
osophyinsuchcasescouldbeto
att
ractt
hebestt
alentatahighsal
arybutkeept
he
si
zeofthecompanyv er
ylean.
Somecompani esrecrui
tpeopleonl
yfrom t
he
presti
giouspr ofessi
onalinst
it
uti
onstogain
professionaledge.
Toatt
ractpeopl
efr
om t
hesesourceswil
lobv
iousl
y
taket
hecompensati
onl
evelqui
tehigh.
Thecompanyobj
ect
ivesi
nturnwil
ldependoni
ts
capaci
tyt
opayandi
tscostbenef
itanal
ysi
s.

Mar
ketsi
tuat
ionisanot
herf
act
orwhi
chwi
lldeci
de
t
hecompensati
onlevel
.
Certai
ntypesofskil
ledpeopl
eandcertai
nkindof
experi
encedcandidatesar
everyscar
celyav
ail
abl
e.
Forexample,i
nbanking,exposurei
nt hear
eaof
for
eignexchangetr
ade,treasur
yorrisk
managementi sav
ail
ablet oaveryf
ewcandi dat
es.
Nat
ural
ly
,thei
rmar
ketdemandandv
aluei
shi
gh.
Joi
nCAI
IBWI
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Themarketsi
tuationdependsuponprevai
li
ng
marketr
atesforcertai
ntypesofemploy
eesand
exper
ti
setober ecrui
tedandthei
rdemandand
suppl
ysit
uati
on.
Ther
equir
ementgoesupi
fthenewcompani
es
comeint
oexi
stence.
Theorgani
sati
on'
spoli
cyof“ov
eral
lgr
owth”or“
the
ri
ghtmanont her
ightj
ob”al
sohasanimpacton
marketcondi
ti
on.
I
ft hepoli
cyofoveral
lgrowthisfoll
oweditmaybe
possibl
etodevel
opf rom int
ernalsourceamanto
reachsuchposit
ionandt hecompanymaynotbe
total
lyatthemercyofthemar ketsit
uati
on.
Int
ernalandexter
nal
fact
orsdet
ermi
net
hel
evel
sof
compensation.
I
nter
nalf
act
orscoul
dbe:
capaci
tyofthecompanyt opay,bar
gai
ningpower
oftheunions,at
tract
ionandret
enti
onpressur
es,
themotiv
at i
onalfact
or,et
c.
Joi
nCAI
IBWI
THASHOKonYouTube
Ext
ernalf
act
orsi
ncl
ude:
Labourlawsgov er
ningthesubjectofwages,
provi
sionsofCompani esActinrespectof
remunerationofmanagers,dif
ferentwage
concepts,compensati
onsur v
eys,
recommendat i
onsofar bi
tr
ati
ons, paycommissi
ons,
etc.

Compensat
ionTheor
ies:
Letusnowconsi
derconcept
ualandt
heor
eti
cal
aspect
sofcompensat
ion.
Agoodcompensat i
onpackageshoul dcover
fact
orsli
keadequacy,societalconsi
derati
ons,
supplyanddemandposi t
ion, f
air
ness,equalpayf
or
equalworkandjobevaluation.
Theseconcept
sar
eexpl
ainedbr
ief
ly:
AdequacyofWages:
TheCommi t
teeonFairWagespr
onouncedcer
tai
n
wageconceptssuchas:
Joi
nCAI
IBWI
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1-
Mini
mum wages
2-
Liv
ingwages
3-
Fai
rwages
4-
Need-
basedmi
nimum wages
Whiletheconceptofmi nimum wagesiswagelev
el
tosustai
nthewor ker,
li
v i
ngwagesconsider
sthe
aspectofsati
sfacti
onofsocialneedsand
i
nsurancecoverage.
Fairwagesistheonebetweenthemi ni
mum wages
andtheonewhi chcouldbedeter
minedont he
capaci
tyoftheorganisat
iont
opay ,
butcov eri
ngthe
aspectsofproducti
vit
yofworker
,prevai
li
ngr at
es,
economicscenario,et
c.
Theneed-basedmini
mum wagesar
eaimedat
sat
isf
yingthemini
mum humanneedsoft
heworker
.
Youmaychecktheupdatedmi
nimum wagesher
e:
htt
p:/
/www.
paycheck.
in/
main/
salar
y/mi
nimumwag
es
Joi
nCAI
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Al
ignmentofCor
porat
eSt
rat
egy
,HRSt
rat
egyand
Compensati
onSyst
em

Soci
etalConsi
der
ati
onsandLegalFr
amewor
k:
Thelevelofcompensati
oninanyindust
ry,
theor
eti
call
y,get
sdecidedbythesocio-
economi
c
consi
derati
ons.
Skeweddistri
but
ionofwageswil
lmaketheflowof
suppl
yshiftandwitht
heappli
cat
ionofbasi
c
pri
nci
pleofdemandandsupplytheequi
li
bri
um wil
l
beatt
ained.
Joi
nCAI
IBWI
THASHOKonYouTube
Thi
smeansthatt
hecompensat
ionl
evel
swill
,mor
e
orl
ess,
tendt
obeatparf
orthecomparabl
ework.
I
npr
act
ice,
howev
er,
thi
shappensv
eryr
arel
y.
Inthefr
eeeconomyt heGovernmentdoesnot
contr
oltheaspectofwageadmi ni
str
ati
onand
normall
ythemar ketforcesdeter
minethe
compensati
onlev el
.
However,t
headmi ni
str
ati
onisboundt
opr
otectt
he
workf
orcefrom i
rr
ati
onall
ylowwages.
Taki
ngthi
sasthepri
meobj ect
ivet
heI
ndi
an
Gover
nmenthasenacted:
1-
ThePay
mentofWagesAct
,1936
2-
TheMi
nimum WagesAct
,1948
3-
ThePay
mentofBonusAct
,1965and
4-
TheEqualRemuner
ati
onAct
,1976.
TheseAct
sensur
e
*
Pay
mentofwagesatr
egul
ari
nter
val
s,
*
Prohi
bitunaut
hor
iseddeduct
ionsf
rom t
hewages,
Joi
nCAI
IBWI
THASHOKonYouTube
*Defi
neacert
ainmi
nimum levelofwagesfor
cert
aini
ndust
ri
eswhichoughttobepaid,
*Pr
ovi
deforpay
mentofbonus,inthefor
m of
def
err
edwagesever
yyeari
rrespecti
veofthepr
ofi
t
orl
ossoftheor
gani
sat
ion,
*Deci
detheminimum andmaxi
mum r
atesf
or
paymentofbonusand
*Propoundthepr
inci
pleofequalr
emunerati
onf
or
equaljobst
obothmenandwomenwor kers.
Thus,t
heGov ernmenthasensuredabareminimum
l
evelofcompensat i
ontotheworker
sandensur es
thr
oughitsadmi ni
str
ati
vearmsandlaw-enf
orci
ng
author
it
iesthatther
eisnoexploi
tat
ionofworkers
atthehandsofempl oyer
s.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE–C
Chapt
er23:Empl
oyee’sFeedbackandRewar
d
System
(
PART-
V)
Whatwewi
llst
udy
?
*
Whati
sJobEv
olut
ion?

JobEv
aluat
ion:
Thi
sisoneimportantmeasuret
odet
ermi
net
he
l
evelofcompensati
onpackage.
Asci
enti
ficj
obeval
uati
onwil
lensur
epari
tyof
compensati
onl
evel
sforsi
mil
arorequalj
obs.
Ital
sohelpsindist
ingui
shi
ngjobsi
nthel
evelof
complexi
ty,ski
ll
srequir
ed,
theri
ski
nvol
vedandli
nk
compensationsaccordi
ngl
y.
Jobeval
uationisamet
hodofappr
aisi
ngtheval
ue
orwort
hofonej obi
ncompar
isontootherj
obsi
n
theor
ganisati
on.
Joi
nCAI
IBWI
THASHOKonYouTube
Theobj
ect
ivesar
e:
*
todet
ermi
net
hecompensat
ionr
ates.
*
tol
inkpaywi
tht
her
equi
rementoft
hej
ob.
*t
oprovideforpaydi
ff
erent
ial
staki
ngintoaccount
ski
ll
s,ef
fort
s,hazar
dsrequi
redineachjob.
*
toest
abl
ishacompensat
ionst
ruct
ure.
Thepr
ocessi
ncludesjobanal
ysi
s,j
obdescr
ipt
ion
andj
obspeci
fi
cation.
Thejobev al
uati
onmayalsobeusef ulf
orsome
otheraspect
sintheorgani
sati
on,vi
z.,manpower
pl
anning,perf
ormanceapprai
sal,
etc.
Thejobsarer
ankedaccordi
ngtotheper
cei
ved
di
ff
icult
yandval
ueaddit
iontheymake.
Theyareclassi
fi
edingr oupsbasedonskill
i
ntensit
y,di
ffi
cul
ty,hazards,
responsi
bil
it
y,
exper
iencerequi
red,etc.
Oncethej
obsarerankedandclassi
fi
edi
tiseasyt
o
deci
dethel
evelofpayforeachjob.
Thej
obswhi
char
econsi
der
edmor
eval
uabl
etot
he
Joi
nCAI
IBWI
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organisati
onthant
heonewhi
char
enotso,
wil
l
obviouslycar
rymorepay
.
Simi
lar
lyt
hehigherl
evelofr
esponsi
bil
it
ywi
ll
commandhigherpay.
Fol
lowingthi
sdoctri
nethesuperv
isorsdrawmor e
paythantheworkersbecauset
her esponsi
bil
it
y
andexperi
encerequir
edareofahigherorder.
Howev er
,inexcept
ionalcasesthesupervi
sorsmay
drawlowerpayifthejobtobeper f
ormedbyt he
workersisri
skyandrequireshi
gherskil
lsorhar
d
physi
calwork.
JobEv
aluat
ionTechni
ques:
1.Non-
quant
it
ati
veMet
hods:
(
a)Ranki
ngorJobCompar
ison
(
b)Gr
adi
ngorJobCl
assi
fi
cat
ion
2.Quant
it
ati
veMet
hods:
(
a)Poi
ntRat
ing
(
b)Fact
orCompar
ison
1.Non-
quant
it
ati
veMet
hods:
Joi
nCAI
IBWI
THASHOKonYouTube
(
a)Ranki
ngMet
hod(
Jobcompar
ison)
:
Eachjobasawholeiscomparedwi
thotherand
thi
scompari
sonofjobsgoesonunt
ilal
lthejobs
havebeeneval
uat
edandranked.
Allj
obsarerankedintheor
derofthei
rimpor
tance
fr
om thesimplestt
othehardestorf
rom t
he
hi
ghesttothelowest.
(
b)Gr
adi
ngMet
hod(
JobCl
assi
fi
cat
ion)
:
Jobgr adesaredef
inedandjobsar
ecl
assi
fiedint
o
gradesbycompar i
ngthewholeJobDescr
ipti
on
withthegradeddefi
nit
ion.
Joi
nCAI
IBWI
THASHOKonYouTube
2.Quant
it
ati
veMet
hods:
(
a)Fact
orCompar
ison:
Dif
fer
entfact
orsar
esel
ectedwhichar
eusuall
y5
andareassumedtobeconstantf
oral
lthej
obs.

Eachf
act
ori
srankedi
ndi
vi
dual
lywi
thal
lot
herj
obs.
Forexampl
e,al
lthejobsmaybecomparedfir
stby
thefact
or“
mentalrequi
rement
s”,
Responsi
bil
it
yet
c.
Thepoi
ntsar
ethenassi
gnedt
oeachf
act
or.
Theval
ueofthejobi
sthenobt
ainedbyaddi
ngal
l
thepoi
ntv
alues.
Joi
nCAI
IBWI
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A' t
oolmaker '
jobist obeev aluat ed.After
compar i
son, i
ti sfoundt hatitsski l
lissimil
arto
electr
ici
an( 5),ment alrequi
r ement stowel der(10)
Phy si
calrequirement stoagai nel ectri
cian(12),
wor ki
ngcondi ti
onst omechani st( 24)and
responsibil
it
yal sot omechani st( 3).Thus,thewage
rateforthejoboft oolmakerwi llbeRs.54( Rs.5+
Rs.10+Rs.12+Rs.24+Rs.3) .

(
b)Poi
ntMet
hod:
Thisisthemostwi del
yusedmet hodofjob
evaluat
ion.Underthismet hod, jobsarebrokedown
basedonv ariousidenti
fiable/compensablefactor
s
suchasski l
l,eff
ort,tr
aining,knowl edge,
hazards,
responsibi
li
ty,et
c.Thereaf t
er,pointsareall
ocated
toeachoft hesefactors.

Weightsaregiv
entofactorsdependi
ngont hei
r
i
mpor tancet
operf
ormt hejob.Point
sarethen
cal
culatedbymult
ipl
yi
ngt hedegreesbythe
wei
ght s.
Joi
nCAI
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Pointssoall
ocatedt ovar
iousfactor
sofaj obare
thensummed.Then, thej
obswi t
hsimilart
otalof
pointsar
eplacedi nsimil
arpaygrades.Thesum of
pointsgi
vesanindexoft herel
ativesi
gnifi
canceof
thejobsthatar
er ated.

Thenexttaskistocal
cul
atethejobeval
uati
on
poi
ntsfortheremaini
ngbenchmarkjobsusi
ngthe
est
abli
shedcompensablefactor
sandspecifi
ed
wei
ghtsabov e.

Forexampl
e
CompensableFact
or–JobEval
uat
ionf
or
Recept
ioni
stusi
ngPoi
ntMethod
Joi
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Joi
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I THASHOKonYouTube&App
BWI
ABM MODULE–C
Chapt
er24:Per
for
manceManagement(
PART-
I)
Whatwewi
llst
udy
?
*
Whati
sPer
for
manceManagement
?

I
NTRODUCTI
ON:
Perfor
manceofemployeesisthekeyt
othe
successofanyor
ganisat
ion.
Themai npurposeofHumanResour ce
Dev el
opmenti stodevel
oppeopleinthe
organisationandtoensuret
hatanat mospher
eis
createdandmai ntai
nedinwhichtheemployees
cont r
ibutethei
rbest
.
I
tis,
ther
efor
e,l
ogi
calthatt
hei
rper
for
manceont
he
j
obismeasuredsothatwhatt
heyhav
econt
ri
but
ed
i
sknownandmadeknown.
I
fther
eareanyareasofi
mprov
ement,
theyhav
eto
beaff
ordedanopport
uni
tyt
odoso.
Joi
nCAI
I THASHOKonYouTube&App
BWI
Fli
pposay s,“nocompanyhasachoi ceast o
whet herornotitshouldappraisei
tspersonneland
thei
rper f
ormance, i
tisinev
itablet
hatthe
performanceoft hehiredpersonwillbeeval
uated
bysomeoneatsomet ime.Thechoi ceisoneofthe
methods. ”
Hefur
therdescr
ibest
hechoi
cest
heor
gani
sat
ion
hasi
nthisregar
d:
*
acasual
,unsy
stemat
icandhaphazar
dappr
aisal
,
*atr
aditi
onalandsyst
ematicmeasur
ementof
employeecharact
eri
sti
csandemployee
cont
ribut
ion,
*mut
ualgoalset
ti
ng,
i.
e.,
Managementby
Obj
ecti
ves(MBO).
Per
for
manceappraisali
saprocessbywhi
chthe
managementfi
ndsouthoweffecti
vei
thasbeeni
n
hi
ri
ngandplaci
ngtheemploy
ees.
Def
ini
ti
ons:
Heyeldef
inesper
for
manceappr
aisalas“aprocess
ofeval
uati
ngtheper
for
manceandqualif
icat
ionsof
Joi
nCAI
I THASHOKonYouTube&App
BWI
theemployeesi nt ermsofr equirement soft hejob
forwhi
cht heyar eempl oy ed, forthepur posesof
admini
strationincludingpl acement ,
selectionfor
promoti
ons, prov i
dingfinanci alrewardsandot her
acti
onswhi chr equirediff
er entialtr
eatmentamong
themember sofagr oupasdi stingui
shedf rom
acti
onsaffectingal lmember sequal ly.
”
MonappaandMi rzaSaiyadainputitas‘a
syst
emat icevaluati
onofper sonnelbysupervi
sors
orothersf amil
iarwiththei
rperformancebecause
employ er
sar einter
estedinknowi ngabout
employ eeperformance.Empl oyeesalsowishto
knowt heirpositi
onintheor gani
sation.
'
From thesedef ini
tionsi ti
scl earthatperfor
mance
appraisalisanimpor tanttoolbywhi chthe
organisationsreviewempl oyeeper f
ormance,take
correctiv
est epsthrought raining,inter
venti
onsor
placementdeci sions, rewardgoodper formance
andat temptt otaket heempl oyeeper f
ormancet oa
hi
gherl evel.
Joi
nCAI
I THASHOKonYouTube&App
BWI
APPRAI
SALSYSTEMS:
Perf
ormanceappr ai
sali
sanorgani
sat
ional
necessi
ty.Var
iousapprai
salsy
stemshaveevol
ved
overaperiodofti
me.
Thesesystemsv ar
yfrom si
mpl etocompl
ex,f
rom
vaguetoobjecti
ve,f
rom unstr
ucturedt
ostr
uctur
ed
andfrom confi
dent
ialtoopen.
Anorgani
sati
onhastheopt
iontodev
iceitsown
syst
em orcanadopt
,wit
hcert
ainmodif
icati
ons,
someother'
ssyst
em.
Whatsystem oneshoul
dchoosewil
ldependon
whet
heritful
fil
lst
heobject
ivest
heorgani
sat
ion
want
sthesy stem t
oserve.
Indeed,thesystem'ssuccessdependsontheti
me
i
tt akestocarryouttheapprai
salexer
ciseandhow
easilypeopl
eadoptt hesystem.
Aninformalapprai
salsy
st em i
spossibl
einav er
y
smallorgani
sati
onwheret heemployee's
contr
ibuti
onisreadi
lyvi
sible.However,
thisi
snota
sci
entif
icway.
Joi
nCAI
I THASHOKonYouTube&App
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Theorgani
sati
onmaygr owoveraperiodofti
me
anditmaybenecessarytohavearecordofone'
s
achi
evementsorf
ail
ures.
Thisemphasisest
heneedf
orhav
ingasy
stemat
ic
apprai
salsy
stem.
Obj
ect
ivesofPer
for
manceAppr
aisalSy
stem:
I
tispossibl
etoachi
evesev
eralobject
iveswi
tha
well
-desi
gnedper
for
manceappraisal.
AsobservedbyMcGregort
heperf
ormance
appr
aisalpl
ansmeetthr
eeneeds:
1-Judgment
al–f
orsal
aryi
ncr
eases,
transf
ersand
promoti
ons;
2-Dev el
opmental–t el
li
nganempl
oyeehowishe
doingandsuggest i
ngchangesi
nhisski
ll
s,
att
itudes,behav
iour;
3-Counsell
ingbythesuper
ior–forgivi
ngfeedback
andunderstandi
ngprobl
emsf orpoorperf
ormance.
Joi
nCAI
I THASHOKonYouTube&App
BWI
Manyoft heexperts,however
,consi dert
hati
t
ser
v estwoneeds, i
.e.j
udgment aland
developmental;
counselli
ngbeingpar tof
developmentalneed.
Theover
allobj
ect
iveoftheper
for
manceapprai
sal
i
stoimprovetheeff
ici
encyoft
heorgani
sat
ion.
Thespeci
fi
cobject
ivest
hesy
stem achi
evescoul
d
besummar i
sedasunder:
1-t
oenablet
heorganisati
ontomai nt
ainan
i
nvent
oryoft
hequali
tyandski l
lsofpeopl
eand
i
denti
fyandmeett
heirtrai
ningneeds;
2-t
odetermi
netheper
for
mance-
li
nkedincr
ements
andpr
ovidedat
aforpr
omoti
onsandtr
ansfers;
3-tomai ntai
nindi
vi
dualandgroupdevel
opment
andfulfi
lthei
raspir
ati
onsbyshari
ngwi t
ht hem
thei
rstandardofobservedper
formanceandhel p
them r
eacht hebenchmarksbyskil
lupgradati
on
progr
ammes.
Perf
ormanceapprai
sali
sanimport
antt
oolbot
hfor
theorgani
sat
ionandtheempl
oyee.
Joi
nCAI
I THASHOKonYouTube&App
BWI
Ift
heobject
ivesarewelldefi
nedandunderst
oodby
thepar
ti
esconcer ned,i
tsi
mplementat
ionbecomes
easyandmeani ngful
.
I
twil
lthenbei
naposi
ti
ont
oreachamul
ti
-useabl
e
l
evel
.
UsesofPer
for
manceAppr
aisal
:
Havingseentheobject
ivesoftheper
for
mance
apprai
salsyst
em,itisr
elati
vel
yeasytol
istdowni
ts
var
ioususes.
I
tisatoolt
oevaluat
eobj
ecti
vel
ytheper
for
mance
oftheempl
oyeesonthegi
venjob.
Whil
edoingso,ital
sothrowsli
ghtont
he
char
act
erist
icsandtrai
tsoft
heemployees.
Dat
aont hesefr
om theseaspect
softhe
employ
ee’sper
sonalit
ycanbeusefulf
orcer
tai
n
per
sonneldeci
sions.
Vi
ewedf r
om thi
sangl
e,t
hewi
der
angeusesoft
he
sy
stem are:
*I
trat
esal
ltheemploy
eesinauni
fi
edmannerby
usi
ngthesamerat
ingscal
esandt
husmakingthem
Joi
nCAI
I THASHOKonYouTube&App
BWI
compar
abl
eonacommonf
oot
ing.
*I
tprovi
desinfor
mat i
onwhichcouldbecri
ti
cal
whil
edecidi
ngonpr omoti
on,payincr
eases,
t
ransfer
s,tr
aini
ng,etc.
*I
tprovi
desinfor
mati
onaboutthear
easof
weaknessesoftheempl
oyeetoenabl
eini
ti
ati
onof
corr
ecti
vesteps.
*I
timprovesthequal
it
yofsuper
visi
onast
he
super
visorbecomesakeenobserver
.
*Thesy st
em, i
fimplementedwi t
hopennessand
tr
ust,ensuresbett
erint
erpersonalrel
ati
ons
betweent heemployeeandhi ssupervi
sor.
Howev er,i
npr act
ice,
t hesyst
em i
sgeneral
ly
cri
ti
cisedbyt heempl oyeesduei
tsfail
uret
omeet
oneort heotherobjectivesment
ionedabove.
Joi
nCAI
IBWI
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ABM MODULE–C
Chapt
er24:Per
for
manceManagement(
PART-
II
)
Whatwewi
llst
udy
?
*
Whati
sPer
for
manceAppr
aisalPr
ocess?
Per
for
manceAppr
aisalPr
ocess:
Toachiev
etheobjecti
vesandt obei naposit
ionto
usethesyst
em totheful
lestextent,t
he
organi
sat
ionhastochooseanappr opri
atemethod
fr
om thevar
iousal
ternat
ivemet hods.
Dependi
ngoni
tsrequi
rementsandobjecti
ves,
the
chosenmet
hodcanbemodi f
iedsui
tably.
Howev er
,beforedecidi
nguponwhichmet
hodto
adopt,i
tisnecessarytounder
standt
heev
aluat
ion
process.
Ther
ear
efol
lowi
ngst
epsi
ntheev
aluat
ionpr
ocess:
1.Theprocessbegi
nswit
htheor
ganisat
ionset
ti
ng
the“per
for
mancestandar
ds’i
nadvance.
Thesestandardsshoul
dbecl
ear
,real
ist
icand
measurable.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Iti
sadv i
sabl
etoinv
olv
et hel
i
nemanager sint
he
exerci
seastheyunder
standthenuancesandnit
ty-
gri
tt
yoft hej
ob.
2.Theper
for
mancest
andar
dsthenarer
equi
redt
o
becommunicat
edtot
heemployees.
3.Thenextstageistomeasuretheperformance.I
t
canbedonet hroughthedataavai
labl
ewiththe
depar
tment,personalobser
vati
ons,andfeedback
fr
om theappraisee.
4.Performancelev
eloftheemployeeisthen
compar edwitht
hebenchmarkorst andar
dalready
establ
ished.Dev
iati
onsaredi
scussedandt he
reasonsfordevi
ati
onsarenoted.
5.Theout
comei sdiscussedwit
htheemployee,
emphasi
singt
hest r
ongpoi nt
sandcounsel
li
nghim
ontheweakpoints.
6.Thelaststepistoini
ti
atecorr
ecti
vemeasures
andactont heposit
iveperfor
mancebydecidi
ngon
vari
ousincenti
vesli
keincrements,
promot
ions,
tr
aini
ngneeded, et
c.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Theabovestepsseem qui
tesi
mpl
eandl
ogi
calt
o
befol
lowed.
Butthereareonlyf
ewor ganisat
ionst
hattakethe
appraisalpr
ocessser
iouslyandobserveallt
hese
stages.
Apartfr
om thi
s,t
herearegenuinedif
fi
cul
ti
esin
set
tingper
formancestandardsasmanyoft hej
obs
i
nvolveset
sofstepsoractionswhichcannotbe
quanti
fi
edormeasuredeasily.
Speci
alatt
enti
onneedst obepai
dtot hesest
epsas
other
wisethetooll
osesitscr
edi
bil
it
yandt he
employeel
oseshisfait
hinthesyst
em.
Manyaproblem st
em fr
om suchdi
ssati
sfact
ionof
t
hestaf
fwithrespectt
otheapprai
salsy
stem.
Ther
ear edif
fer
entmet
hodsofper
for
mance
appr
aisal.

Theycanbegroupedast
radi
ti
onalmet
hodsand
modernmethods.
Joi
nCAI
IBWI
THASHOKonYouTube&App
Whil
ethetradit
ionalmethodsemphasiseonrat
ing
thei
ndiv
idual'
spersonali
tytr
ait
s,t
hemoder n
methodslayimportanceontheresul
ts-job
achi
evementratherthanonpersonal
it
y.
I
tisbeli
evedt
hatconcent
rat
ingmor
eont heend
r
esult
smakest hepr
ocessmoreobj
ect
ive.
Fol
lowingi
sthel
istoft
het
radi
ti
onalandmoder
n
methods:
Tr
adi
ti
onalMet
hods:
1-
FreeFor
m EssayMet
hod
2-
Str
aightRanki
ngMet
hod
3-
Compar
isonMet
hod
4-
Gradi
ngMet
hod
5-
Graphi
cRat
ingScal
eorLi
nearRat
ingScal
es
6-
For
cedDi
str
ibut
ionMet
hod
7-
For
cedChoi
ceDescr
ipt
ionMet
hod
8-
GroupAppr
aisalMet
hod
Joi
nCAI
IBWI
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Moder
nMet
hods:
1-
AssessmentCent
reWor
kshops
2-
ManagementbyObj
ect
ives(
MBO)
3-
HumanAssetAccount
ingMet
hod
4-
Behav
iour
all
yAnchor
edRat
ingScal
es(
BARS)
5-
360Degr
eeAppr
aisalMet
hod
Letusnowdiscusst
hesemet
hodswi
tht
hei
rmer
it
s
anddemeri
ts:
Tr
adi
ti
onalMet
hods:
Fr
eeFor
m EssayMet
hod:
I
tist
otal
lyunst
ruct
uredmet
hodofappr
aisal
.
I
nt hi
smet hod,
theapprai
sermakesafreef
orm,
open-endedapprai
saloft
heemployee.
Thesystem t
husgi v
esabsolut
efreedom t
othe
superi
ortowri
teaboutt hej
obknowledge,
employee'
satti
tudes,devel
opmentneeds,et
c.
Thedrawbackofthesystem i
sthati
tcoul
dleadt
o
atot
all
ysubject
iveev
aluati
onandcomparison
Joi
nCAI
IBWI
THASHOKonYouTube&App
bet
weent
woempl
oyeesi
sdi
ff
icul
t.
Thisty
peofappr
aisalsy
stem i
sgener
all
yusedt
o
apprai
set
hetopmanagement .
St
rai
ghtRanki
ngMet
hod:
Thi
sistheol
destandsimpl
emet
hodof
per
for
manceappraisal
.
Ther
elat
iveposi
ti
onofeachempl
oyeei
sassessed.
Peoplear
erat
edi
nor
derofmer
itandpl
acedi
na
groupi
ng.
Thesystem obvi
ousl
ysuff
ersf rom numer
ous
drawbackssuchasiti
sdiff
iculttocomparean
i
ndivi
dualwithot
hershav
ingv aryi
ngbehaviour
tr
ait
s.

Compar
isonMet
hod:
Thisisamodifi
cati
onoft
heearli
ermet hodwher
e
eachemployeeiscompar
edoncer tai
nselect
ed
fact
orssuchasleader
shi
p,i
nit
iat
ive,et
c.
Joi
nCAI
IBWI
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Thi
smethodi
sal
soknownasf
act
orcompar
ison
method.
Whenthenumberofempl
oyeesislar
geitbecomes
di
ff
icul
ttocompar
eandrankthem ondi
ffer
ent
at
tri
but
es.
Incaseoflar
genumberofempl oyees,
thepared
comparisonmethodisqui
teusefulwheretwo
employeesarecomparedatatimeandt heover
all
ranki
ngisworkedoutbytaki
ngintoaccounthow
manyt i
mesaempl oyeewaspreferr
edin
comparisonwit
hotheremployees.
Gr
adi
ngMet
hod:
Thisi
sasimplemethodwherecert
ainfeat
uresare
consi
der
edforgradi
ng,suchasanal
yti
calabil
it
y,
j
obknowledge,et
c.
Cer
tai
nscal
esar et
hendecidedandtheempl
oyee
i
sgradedonthosefeat
uresonthescal
e.
Thescal
ecoul
dbeA:out
standi
ng;
B:v
erygood;
C:
aver
age;
D:bel
owaver
age.
Thi
sisawi
del
yusedmet
hod.
Joi
nCAI
IBWI
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Gr
aphi
corLi
nearRat
ingMet
hod:
Thi
sisanot
hermostcommonl
yusedmet
hod.
Themethodconsi
der
stwofactor
s:empl
oyee
char
act
eri
sti
csandcont
ri
buti
on.
Personalqual
it
iessuchasi
nit
iat
ive,
dependabi
li
ty,
decisi
veness,
etc.,
aremeasur
ed.
Withr
egar
dtocont
ri
buti
on,bothqual
it
yand
quant
it
yofwor
kareconsi
dered.
Whil
emeasuri
ngcontri
but
ion,wei
ghtagesare
assi
gnedt
oboththequali
tyandquanti
ty.Rat
ingi
s
onaconti
nuousscal
e.
Thedrawbackofthesy
stem i
sthatt
her
ati
ng
gener
all
ytendst
obesubjecti
ve.
Thesy
stem assumeseachchar
act
ert
obeequal
ly
i
mport
antforallj
obs.
For
cedChoiceDescr
ipt
ionandFor
cedDi
str
ibut
ion
Methods:
Thesemethodsf
orcet
hesuper
iort
omakehi
s
choi
ces.
Joi
nCAI
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Theunder
lyi
ngi
deai
stomi
nimi
set
hebi
as.
Theemployeeisratedonapr
edet
ermi
ned
di
str
ibut
ionscale.
Thefact
orsnormal
lyconsideredarej
ob
per
formanceandsuit
abil
it
yf orpr
omotion.
Inthechoi
cedescri
ptionmethodthesuperi
oris
askedtoselectt
hestatementswhichbestdescr
ibe
theemployee.
Thestat
ementsarepredet
ermi
nedset
sof
descr
ipt
ionofpeopl
e.
Gr
oupAppr
aisalMet
hod:
Thisi
samet hodinwhichempl oyeesarer
atedbya
groupofapprai
sersconsist
ingoftheimmediate
supervi
sorandthr
eeorf ourother
s,whohavesome
knowledgeoftheperf
ormanceoft heemployee.
Theadvant
agei
sthati
tisathor
oughmethodwi
th
l
eastbi
asasiti
nvol
vesmult
ipl
erat
ers.
Buti
tisav er
yti
meconsumi ngprocessandmay
getr
educedt oj
ustari
tuali
fthenumberof
employeestoberat
edishigh.
Joi
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ABM MODULE–C
Chapt
er24:Per
for
manceManagement(
PART-
II
I)
Whatwewi
llst
udy
?
*Whatarethemoder
nmet
hodsofPer
for
mance
Appr
aisal
?

Moder
nMet
hods:
1-Assessmentcent
rewor
kshops:
Thi
sisamoder
nmet
hodofassessment
.
Iti
saradicall
ydif
ferentmet
hodf
rom t
het
radi
ti
onal
apprai
saltechni
ques.
Themethodusesanumberofassessorsand
di
ff
erentassessmentt
ool
sint
heform ofact
ivi
ti
es.
Inajob- r
elatedsimulatedsituationthebehav iourof
theempl oy eeisassessedt hrought heir
perf
or manceondi f
ferentactivi
ties/exerci
sessuch
asgr oupdi scussi
on,businessgames, i
n-basket
exercise,commi tt
eemeet ings, psychomet ri
ctests,
etc.
Joi
nCAI
IBWI
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Pur
poseofAssessmentCent
re:
1.t
omeasurethepotenti
aloft
hecandi
dat
efor
hi
ghermanageri
alposi
ti
on;
2.t
oassesst
rai
ninganddev
elopmentneeds;
3.tosel
ectcandidat
esi
ncampusr
ecr
uit
mentor
fr
eshstudent
sf orempl
oyment
;
4.t
oident
if
yfut
urepot
ent
iall
eader
s.
TheAssessmentCent regener allymeasures
i
nterper
sonalskill
s,leadershi
pqual i
ti
es,organising
andplanningabil
iti
es,problem- solvi
ngabi l
it
ies,
str
esstolerancecapacity,motiv ati
onalori
ent at
ion
andcommuni cat
ionskill
soft hecandi dates.
Thedr
awbackoftheAssessmentCent
rei
sthati
tis
ati
meconsumingact
ivi
ty.
Goodperf
ormer
sar
eav
erset
othei
deaofexam-
t
aking.
Ital
sor equir
eshighl
ytrai
nedobser
verstoassess
vari
ousper sonal
ityt
rai
tsandbehavi
ourpatt
ernof
candidates.
Joi
nCAI
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2-
ManagementByObj
ect
ives(
MBO)
:
Thismethodattempt
st omi
nimiseext
ernal
contr
olsandemphasisesonthemotiv
ati
onlev
els
oftheemployees.
Thisissoughttobeachi
evedthroughjointgoal
sett
ingandtheemployeeparti
cipat
ioninthe
decisi
onsthatdir
ect
lyaf
fecthi
m.
Theobj ect
iveoftheMBOi stochangethe
behaviourandat t
it
udeinrespectofget
ti
ngt
he
resul
ts.Iti
sar esult
-or
ient
edsystem.
Thesystem emphasi
sesongoalachi
evement
rat
herthanthemethodinv
olv
ed.
MBOPr
ocess:
1.Theor
gani
sati
onalgoalsar
ef i
rstsetandar
e
cl
earl
yst
atedi
nmeasur ablet
argets.
Thesegoal
shav et
obereal
ist
icandachi
evabl
e,
al
thoughchal
lengi
ng.
2.Thegoalsett
ingprocessisaj
ointpr
ocess.The
short
-t
erm per
formancegoalsaresetj
oint
lybythe
employeesandthei
rsuperior
s.
Joi
nCAI
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3.Ther
earef
requentr
evi
ewsofper
for
mance
thr
oughonet
oonemeet i
ngs.
4.Shari
ngoffeedbacki
nsuchmeeti
ngshel
psi
n
al
teri
ngthecourseofact
ion,
ifr
equi
red.
I
tact
sasamoti
vati
ngfact
orasonegetstoknow
wher
ehest
andsthr
oughthef
eedbacksessi
on.
Iti
s,therefor
e,aprocessofset
tinggoals,
exchangingfeedbackandseekingpart
icipat
ionof
employ ees.

Adv
ant
agesofMBO:
1.I
tinv
olv
espar
ti
cipat
iveappr
oachi
ngoal
-set
ti
ng.
2.I
tenhancest
hemot
ivat
ionall
evel
soft
he
employ
ees.
3.Itcr
eatesanatmosphereofcompeti
ti
onwi
thi
n
theorganisat
ionf
orenhancedper
for
mance.
4.I
tpr
ovi
desobj
ect
iveappr
aisalmet
hod.
5.Probl
emscanbeidenti
fi
edintheear
lyst
ages
thr
oughrev
iewsandfeedbacksessi
ons.
Joi
nCAI
IBWI
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6.I
tisaneff
ect
ivetoolf
ori
dent
if
yingt
het
rai
ning
anddevel
opmentneeds.
Di
sadv
ant
agesofMBO:
1.I
tisasyst
em whi
chconcent
rat
esonr
esul
tsand
notonthepr
ocess.
2.Itmayleadtounheal
thycompet
it
ionamongst
theemployees.
3.I
tmaycr
eat
eaconfl
ict
ingsi
tuat
ionwheni
t
comest
ogoal
-set
ti
ng.
4.Someti
mes,ver
ysoftt
arget
saresett
oshow
hi
gherperf
ormanceachi
evement
.
3-
HumanAssetAccount
ingMet
hod:
Inthi
smet hodt
heempl oyeesoftheorgani
sati
on
aretreatedasHumanCapi t
alandmoneyestimates
areattachedtotheval
ueofanor ganisat
ion'
s
personnelanditsext
ernalgoodwill
.
Theprinci
plebehindt
hissyst
em i
sthat,
li
keany
otherasset,humanasseti
salsov
aluabl
etothe
organi
sation.
Joi
nCAI
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Ifanytr
ainedandexper iencedempl oyeeleav
es,the
humanassetv aluedepreciatesandifsomeone
j
oinstheor ganisati
onbringingwithhimtheskil
l
s
andexperiencei mport
antt oit,t
hehumanasset
valuei
ncreases.
Thecurr
entvalueofthehumanassetisapprai
sed
byundert
aki
ngper i
odicmeasurementsoftwo
var
iabl
escall
ed'keycausal
'and'i
nter
veni
ng
ent
erpr
ise'
.
Thefi
rstv
ari
abl
e( '
keycausal
')includes
managementpol
icies,
str
ategies,skil
ls,
etc.
Thelat
er('
i
nter
veni
ngent
erpr
ise'
)includesloyal
ty,
att
it
udesandmotiv
ati
onl
evel
, ef
fecti
veinteract
ion,
et
c.
Agai
n,t
hisi
snotamethodf
ori
ndi
vi
dual
per
for
mancemeasur
ement.
Atbesti tcanmeasur
ehumanper f
ormanceof
organisati
onasawhol ei
ntermsofincr
easeor
decreasei nhumanassetorhumancapit
alval
ue.
Joi
nCAI
IBWI
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4-
Behav
iour
all
yAnchor
edRat
ingScal
es(
BARS)
:
Thi
sisanewappr
aisalt
echni
que.
Thejobsaredescri
bedthr
oughi
ll
ustr
ati
onsorby
gi
vi
ngcr i
ti
cali
ncident
sofeff
ect
iveandi
neff
ecti
ve
per
formance.
Basedont
hesei
nci
dent
sar
ati
ngscal
eisdev
ised.
Asetofi
ncident
sareusedas“behav
iouranchor
s'
f
ortheper
formancedimensi
ons.
Whi
lethesy
stem i
sreasonabl
yobj
ect
ive,
iti
sver
y
t
imeconsuming.
BARSeval
uatest
heper
for
mancei
nter
msofcr
it
ical
empl
oyeebehavi
our
s.

Developi
ngBARSt
ypi
cal
lyr
equi
resf
ivest
epsas
fol
lows:
i
.Identi
fyef
fect
iveandi
nef
fect
ivejobbehav
iour
sto
descri
betheperf
ormancemeasures.
i
i.Conver
tthesej
obbehavi
our
sint
osetof
perf
ormancedimensi
ons.
Joi
nCAI
IBWI
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i
ii
.Jobexpertev
aluat
esthesedi
mensionskeeping
i
nv i
ewthejobdescri
pti
onandcri
ti
cali
ncidences.
i
v .Jobexpertsrat
ethebehaviordescri
bedinthe
i
nci dent
(s)astohoweffect
ivelyorinef
fect
ivel
yit
representsperf
ormanceontheappr opri
ate
dimension
v.Asubsetoft
hei
ncident
sisusedasbehav
iour
al
anchor
sforeachi
denti
fi
ed.

5-360Degr
eeAppr
aisalMet
hod:
360degreer
eferstof
ullcir
cleorallar
oundthe
employ
eeandt heemployeeisinthecentr
e.
Undert
hisapprai
salsyst
em anemployeeisrated
bypeoplewhoareaffect
edbytheperformanceof
theemployeeandhaveadequateknowledgeabout
hisworki
ngandperformance.
Theappraisali
sgener all
ydonebyt hesenior
s,
coll
eagues(peers),subordinates,suppl
ier
s,
customersandal lotherstakeholders.
Joi
nCAI
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Ital
soincl
udest heself-
assessmentbythe
employeehimself.Besidestheper
formance
apprai
sal,
thi
ssy stem servesasagoodf eedback
mechanism fortheempl oyeeandtheorganisat
ion
fort
akingcorrecti
vemeasur esanddevelopment al
i
niti
ati
vestoimpr ovetheperfor
mance.
Beingamult
i-
rat
erappr
aisalsy
stem,
iti
sli
kel
yto
minimi
sehumanbias.
Joi
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ABM MODULE-D
Chapt
er26:
OVERVIEW OFCREDI
T
MANAGEMENT
Whatwewi
llst
udy?
*
Whati
sImpor
tanceofcr
edi
t?
*
Whati
sHi
stor
icalbackgr
oundofcr
edi
tinI
ndi
a?
*
Whatar
evar
ioust
ypesofbor
rower
s?

I
MPORTANCEOFCREDI
T:
Credi
tpl
aysani
mpor
tantr
olei
ndr
ivi
ngt
henat
ional
economy.
I
tprovi
deslever
agetoanentrepr
eneurtoundert
ake
aproj
ectl
argerthanwhathecouldhaveundert
aken
wit
houtavai
labi
li
tyofcr
edit
.
Joi
nCAI
IBWI
THASHOKonYouTube

Thisr esul
tsi
n accel
erat
ed i
ndust
ri
alpr
oduct
ion
/ser
vices.
Italsoenabl
esindi
vidual
stofi
rstpur
chase/creat
e
assets and repay the l
oan fr
om t hei
rf utur
e
earnings.
Cr
edital
soenabl
esaconsumertospendmor
ethan
whathewoul
dhav eot
her
wisespent
.
Theincr
easeddemanddr iv
estheproducer
stostep
up the producti
on.Thus,adequate and cheap
avai
labi
li
tyofcreditpr
opel
stheeconomyt ohi
gher
growthtr
aject
ory.
But
,letusal
sol
ookatt
heot
hersi
deoft
hecoi
n.
Ther
ei salway
sa t imelag between i
ncr
easein
demand and creat
ion of suppl
yt o meet t
hat
demand.
Thatiswhyexcessi
veav
ailabi
li
tyofcr
edi
t,special
ly
,
for nonpr
oducti
ve purposes, puts i
nflat
ionary
pressur
eontheeconomy.
Joi
nCAI
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Sometimes,ReserveBankofI ndiahast ousethe


monetarytool
sav ai
labletoit
,likeBankrat
e,CRR,
SLR,et
c.,t
ocontrolcr edi
tsoast ostr
ikeabal
ance
bet
weeneconomi cgr owthandinfl
ati
on.
HI
STORI
CALBACKGROUNDOFCREDI
TINI
NDI
A:
Pri
vatemoney l
endershav et r
adit
ional
lyplayedan
i
mpor t
antrol
einmeet i
ngthecredi
trequir
ement sof
i
ndivi
dualsinIndi
a,t houghithascausedi tsown
soci
o-economicpr oblemslikeruralindebtedness
andcreati
onofrurallandl
esspopulati
on.
Thepr obl
em wasaggr avat
edduet
ohi
ghl
evelof
i
ll
it
eracy/fi
nanci
ali
ll
it
eracy.
Witht
hegrowthofbanki ngsector,
thispr
oblem has
been t
ackl
ed to a greatextentev en t
hough the
banki
ngsectorcr
edithassomet imesbeenmi sused
asameansofachi evi
ngpolit
icalends.
National
izat
ionofbanksi
n1969wasawat er
shed
eventint hehist
oryofcredi
tfl
ow f
rom banki
ng
sector.
Joi
nCAI
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Pri
ortonati
onali
zati
on,t
heflowofcredi
twasmor e
towar
dsbi g busi
nesshouseswho of t
en had an
ownershi
p/managementint
eresti
nthebanks.
Afternati
onal
izati
on,RBIexer
cisedgreat
ercont
rol
ont hebanksandensuredthatmorecredi
tfl
owsto
thehither
toneglect
edsect
orsoftheeconomy.
Theconceptof“ Pri
ori
tySect
or'becameanintegral
partoft hebankingsyst
em asRBIensuredthata
substantialpor
ti
on ofbank creditfl
ows tot hi
s
sector.

PRI
NCI
PLESOFCREDI
T:
Overaperi
odofti
me,bankershaveevolvedcer
tai
n
basi
cpri
ncipl
esf
orthei
rlendi
ngoper
ations.
Bank'sloanpoli
cies,andot heraspect
sofcr edi
t
management ,ar
ei nf
luencedt oagreatext
entby
theseunwri
tt
enprinci
ples,whichar
easunder:
Joi
nCAI
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(
a)saf
etyoff
unds
(
b)pur
pose
(
c)pr
ofi
tabi
li
ty
(
d)l
iqui
dit
y
(
e)secur
it
y
(
f)r
iskspr
ead

TYPESOFBORROWERS:
Abor
rowercanbe:
(
a)Ani
ndi
vi
dual(I
ndi
anCont
ractAct
)
(
b)Sol
epr
opr
iet
aryf
ir
m
(c)Part
nershi
pf i
rm and j
ointv
ent
ures (
Indi
an
Part
ner
shipAct)
(d)Hindu undi
vided f
ami
ly(
the cust
omar
ylaws
pert
aini
ngtoHindus)
(
e)Compani
es(
Compani
esAct
)
Joi
nCAI
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(
f)St
atut
orycor
por
ati
ons(
theAct
sthatcr
eat
ed
t
hem)
(g) Trust
s and co-operati
ve Soci
eti
es ( I
ndian
Trusts Act, Publ
ic Trusts Act, Co-operat
ive
Societ
iesActortheSociet
iesRegi
str
ati
onAct.
)
(
h)Cl
ubsandAssoci
ati
ons
(
i)LocalAut
hor
it
ies
(
j)Li
mit
edLi
abi
li
tyPar
tner
shi
ps
(
k)Anyot
herl
egalent
it
y
Thelawsappl
icabl
et oal
lthesedi
ff
erentki
ndsof
bor
rower
sarediff
erent
.
Joi
nCAI
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TYPESOFCREDI
T:
Bankcredi
tcanbeei
therf
und-
basedornonf
und-
based.
I
nf und-
based cr
edi
t,thereis act
ualt
ransf
erof
moneyfrom t
hebanktothebor
rower.
I
nnonf undbasedcr edi
t,ther
ei snot r
ansf
erof
money
,butthecommi tmentbyt hebankonbehal
f
oft
hecli
ent
,mayr esul
tinfutur
et r
ansf
erofmoney
tot
hebenef
ici
aryofsuchacommi t
ment.
Example ofthi
si s a bank guar
ant
ee issued in
favourofgovernmentdepartments(oranyot her
benefi
ciar
y)onbehal
fofacont r
act
or,
whoi sbank's
customer.
I
fthebenefi
ciar
yinvokestheguarant
ee,thebank
wil
lhav
etoremittheamountt oi
tandthecli
ent
,for
whom guar
anteewasi ssued,wi
llbeliabl
etopay
t
hisamounttothebank.
Joi
nCAI
IBWI
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Thus,a non fund-


based credi
t al
ways has a
possi
bil
it
yofgett
ingconver
tedintoafund-
based
credi
t.
Apartfr
om guar
antees, theot
herformsofnonf und
basedcredi
tarelettersofcredi
t,co-accept
anceof
bi
ll
s,for
wardcontracts,andderi
vati
ves.

Thefundbasedcredi
tcanbefurt
herdi
vi
ded,based
onperiod,asshor
tterm cr
edi
torlongter
m credi
t
(t
ermloan).
Credi
tcanalsobeclassif
iedbasedonpurpose,
li
ke
worki
ng capit
alfinance,projectfi
nance,expor
t
fi
nance,cr
oploan,
etc.
Banksof t
encl assi
fythei
rcreditport
fol
iobasedon
the t
ype oft he customerslike,corporat
e,ret
ail
,
agri
cult
ure,i
nternati
onal,
inst
it
utionalcr
edit
,et
c.

Joi
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Joi
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ABM MODULE-D
Chapt
er26:
OVERVIEW OFCREDI
T
MANAGEMENT(PART-
II
)
Whatwewi
llst
udy?
*
Whatar
eComponent
sofCr
edi
tManagement
?
*
Whati
sAppr
aisal?
*
Whati
sRest
ruct
uri
ng/
Rehabi
li
tat
ion?

COMPONENTSOFCREDI
TMANAGEMENT:

LoanPol
icyoft
heBank:
Each bank formul
ates its own loan pol
icy and
sanct
ionofanycreditproposalhastobewit hi
nthe
fr
amewor kofthi
spolicy
.
Joi
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The formulati
on ofl oan pol
icyisinfl
uenced by
vari
ousf act
orsl i
kemar ketcondi
ti
ons,poli
ciesof
thecompet i
tors,bank'
sownSWOTanal y
sisand,of
course,
theRBIgui deli
nes.
Theloanpoli
cynormal
lycont
ainsgui
del
inesabout
thef
oll
owingaspect
s:
(a)Exposurelimit
sforsinglebor r
ower sandgroups
(b)Exposurel i
mitsfori ndi
vidualsectorsli
ker eal
estat
e,capitalmarket,steel
,cement ,soft
ware,etc.
c) Discret
ionary power s at v ari
ous level
sf or
sancti
oningofcreditproposals.
Appr
aisal
:
Beforeal enderagrees t
o giv
e his moneytoa
borrower,
asperhi sproposal
,afewquesti
onsari
se
i
n hi s mind.Nor mall
y,these quest
ions ar
e as
fol
lows:
(
a)I
sthebor
rowert
rust
wor
thy
?
(b)Whati shegoi ngtodowit
hmymoney ?I
sthe
project/
act
ivi
ty,
whereheisgoi
ngtoputt
hismoney
,
viable?Whataretheri
sksi
nvol
ved?
Joi
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(c)ShouldIgivehimtheamounthehasaskedf
or
or,adi
fferentamount
?
(
d)Whatshoul
dbet
het
ermsofr
epay
ment
,int
erest
r
ate,
etc.
?
(e)Shoul
dItakeanycol
lat
eralsecur
it
yorper
sonal
guarant
ee?
(f
) How shoul d char ge be creat
ed ov er
pri
mar y
/col
lat
eral securi
ty? What documents
shouldbetakentoenforcemyclai
minacour tof
l
awi ncaseofdefaul
t?
Theprocessoffindi
ngtheanswer
stot
heabov
e
quest
ionsi
scredi
tapprai
sal
.
The complexi
tyoft hisapprai
salwilldepend on
var
iousfactor
sl i
ke,amountinvol
ved,durati
onand
pur
pose of l oan,category of borrower,risks
i
nvolved,
securit
yavail
abl
e,RBIgui
deli
nes, et
c.
Thus,apprai
salf
orasmallcropl
oanorav ehi
cle
l
oan willbediff
erentf
rom t
hatforan i
ndust
ri
al
proj
ect
.
Joi
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Deli
ver
y: Thi
s rel
ates to legal aspects of
document
ati
onandcr
eati
onofchargeoversecur
it
y.
Thisalsocoversthemethodofdel
iv
ery(l
ikel
oanor
cashcr edi
tincaseofwor ki
ngcapitall
imit
s)and
proceduresfordi
sbur
salofater
mloan.

Cont
rolandMoni
tor
ing:
Thisi
snecessarynotonl
ytoensur
eenduseoft
he
bank'
sfundsbutal
sotoensur
esafetyofi
t.
An eff
ici
entmonit
ori
ng isinthe i
nter
estofthe
borr
oweraswel l
,becausethebankcanpr ov
ide
ti
melyhelpi
ncaseofunfor
eseendi
ff
icul
ti
es.
Cr
edi
tRi
skManagement:
Credi
tri
ski samaj orriskfacedbyabankanditis
veryi
mpor t
antthatsuitabl
epoli
ciesar
eputinpl
ace
toidenti
fy,measur e and contr
olthi
sriskwithi
n
accept
ablelimi
ts.
Joi
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Rest
ruct
uri
ng/
Rehabi
li
tat
ionandRecov
ery
:
Evenwithbestofloanpol i
cies,apprai
sal
,del
iv
ery,
contr
olandmoni t
oring,creditdefaulti
spossibl
e
ei
therduetogenuinebusinesspr obl
emsorduet o
i
ntenti
onal(
cal
ledwil
ful)default
.
I
nthef i
rstcase,thebanksnor mall
yexaminet he
f
easi
bil
it
y of pr ovi
ding addit
ional assi
stance
/
concessions/
rephasingetc.t
ohelptheenterpri
se
t
omakei tsoperat
ionsviabl
eagai
n.
Thewidel
yknownt er
msli
kerehabi
li
tati
onofsi
ck
SSIuni
tsandCorporat
eDebtRestr
ucturi
ng(
CDR)
arepar
tofthi
spr
ocess.
However
,ifrehabil
it
at i
onisnotconsider
edfeasi
ble
or,i
ftherehabil
it
ationpr ocessdoesnotyieldthe
desi
redresul
ts,andi ncaseofwi lf
uldef
aul
ts,bank
hastost
arttherecov eryprocess.
Joi
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Refi
nance:This aspect of cr
edi
t management
assumes impor
tance int i
mes ofti
ghtliqui
dit
y
posit
ion.
Thereareelaboratenormsf oravai
li
ng r
efinance
fr
om NABARD/ SIDBI
/RBI i
nr espect of cert
ain
pri
ori
tysect
oradvances.

ROLE OF RBI
'
S GUI
DELI
NES I
N BANK'
S CREDI
T
MANAGEMENT:
RBIhasadir
ecti
nfl
uenceoncr
edi
tmanagementof
anybanki
nIndi
a.
Infact,keepi
ng abr
eastwith RBIgui
del
inesand
ensur
ingtheircompl
iancei
sani mport
antworkof
thecredi
tdepart
mentofanybank.
Fol
lowing ar
e some of t he important RBI/
Government guidel
ines/
poli
cies, whi
ch direct
ly
i
nfl
uencethecreditmanagementofabank.
Joi
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EndUseoft
heFunds:
Itisthepri
maryr
esponsi
bil
it
yofbankst
oensure
properenduseofbankfunds/moni
tort
hefunds
fl
ow.
Itis,therefore,necessaryforbankstoevolv
esuch
arrangement sasmaybeconsi der
ednecessaryto
ensur ethatwi thdrawalsfr
om cashcredi
t/over
draf
t
account sar est r
ictl
yforthepurposeforwhichthe
creditli
mi t
sar esanct i
onedbythem.
Thereshoul d beno di ver
sion ofwor king capital
fi
nancef oracquisi
tionoffi
xedasset s,i
nv est
ment s
i
n associ ate compani es/subsidi
aries, and
acquisi
ti
onofshar es,debentures,unit
sofmut ual
funds,andot heri
nvestmentsint hecapi
talmar ket.

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Joi
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ABM MODULE-D
Chapter26:
OVERVI
EW OFCREDI
T
MANAGEMENT(PART-
IV)
Whatwewi
llst
udy?
*
Whati
sExposur
eNor
ms?
*
Whati
sMCLR?

Cr
edi
tExposur
esNor
ms:
RBIhasadvisedthebankst ofi
xli
mitsonthei
r
exposur
etospeci f
icindust
ryorsect
ors(
toavoid
concent
rat
ionrisk)andhasprescri
bedregul
ator
y
l
imitsonbanks'exposuretosingl
eandgroup
borr
owersinIndia.
Someoftheimpor
tantpoi
ntsoft
hesei
nst
ruct
ions
ar
easunder:
Joi
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(
a)Fori
ndi
vi
dual
/Gr
oupBor
rower
s:
Theexposur ecei
li
nglimit
sare15percentof
capitalfundsincaseofasingl
e
borrower (
maximum 20%al l
owed)and40percent
ofcapi t
alfundsinthecaseofaborrower
group(maxi mum 50%allowed)
.
(
b)ForExposur
est
oNBFCs:
Theexposur e(
bothl
endingandinvestment,
i
ncludingoffbal
ancesheetexposures)ofabankt
o
asingleNBFCshouldnotexceed10%ofbank' s
capit
alfunds.
ForNBFC-AFC(AssetFi
nanci
ngCompani
es)shoul
d
notexceed15%ofbank'
scapit
alf
und.
Banksmay ,howev er,assumeexposur esonasingle
NBFC/ NBFC-AFCupt o15percent /20percent
respecti
vel
y,oftheircapitalf
undspr ovi
dedthe
exposureinexcessof10percent /
15percent
respecti
vel
y,i
sonaccountoff undson-l
entbythe
NBFC/ NBFC-AFCt othei nfr
astruct
uresect
or.
Joi
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I
nter
estRat
esonAdv
ances:

Presentl
y,t
hebanksarerequir
edt ofoll
owt he
fol
lowingguidel
inesf
orpri
cingtheiradvances:

Gener
algui
del
ines:
i
.Ther
eshallbeacomprehensivepol
icyoni
nterest
rat
esonadvancesdul
yappr ov
edbytheBoardof
Dir
ect
orsoranycommitteeoftheBoardtowhich
power
shavebeendelegated.

i
i.Allrupeeloanssancti
onedandcr editl
imi
ts
renewedw. e.f
.Apri
l1,2016wi l
lbepricedwit
h
refer
encet otheMarginalCostofFundsbased
LendingRat e(MCLR).
Joi
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Mar
ginalCostofFundsBasedLendi
ngRat
e
(
MCLR):

i
.TheMCLRwi
llcompr
iseof
:
a.Mar
ginalcostoff
unds;
b.Negat
ivecar
ryonaccountofCRR;
c.Oper
ati
ngcost
s;
d.Tenorpr
emi
um.

i
i.Accor
dingl
y,banksshal
lpubl
ishtheinter
nal
benchmarkforthefol
lowi
ngmat ur
it
ies:

a.ov
erni
ghtMCLR,
b.one-
mont
hMCLR,
c.t
hree-
mont
hMCLR,
d.si
xmont
hMCLR,
e.Oney
earMCLR.
Joi
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I
naddi t
iont
otheabove,
bankshavetheopti
onof
publ
ishingMCLRofanyotherl
ongermatur
it
y.

Del
iv
eryofCr
edi
t:
RBIhasadv i
sedthebankst ofol
low,asf
aras
feasi
ble,t
heloansystem,fordeli
ver
yofbankcr
edi
t.
RBIguidel
inesinthi
srespectareasunder:
(a)I
nthecaseofborr
owersenjoyi
ngworki
ng
capi
talcr
edi
tli
mi t
sofRs.10cror
eandabovefrom
thebanki
ngsystem,t
heloancomponentshoul
d
normall
ybe80percent.
Ter
mloan:
80%andcashcr
edi
t:20%
(b)I
nt hecaseofbor r
owersenj oyi
ngwor king
capi
talcr editl
imitoflesst
hanRs.10cr ore,banks
mayper suadethem togoinf orthe‘LoanSy stem'
byofferingani ncenti
veintheform oflowerr ateof
i
nterestont hel oancomponent ,ascompar edt othe
cashcr editcomponent .
Joi
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Fr
amewor
kfordeal
i
ngwi
thl
oanf
rauds:
object
iveofthi
sframeworki
stodi
rectt
hefocusof
banksont heaspect
srel
ati
ngtopr
event
ion,
earl
y
detect
ion,
promptreporti
ngtotheRBIandtotheinvest
igat
ive
agenci
es(forinst
it
uti
ngcri
minalproceedi
ngs
agai
nstthefraudul
entbor
rowers)and
ti
melyini
ti
ati
onoft hestaffaccountabi
li
ty
proceedi
ngs(fordeter
mi ni
ngnegligence,i
fany
)

Earl
yWarni
ngSignal
s(EWS)andRedFl
agged
Account
s(RFA)
:
TheconceptofaRedFl aggedAccount(
RFA)has
beeni
ntroducedintheframeworkasanimpor
tant
stepi
nfraudriskcont
rol.
ARFAi sonewhereasuspi
cionoffr
audulent
act
ivi
tyisthr
ownupbythepresenceofoneormor
e
Ear
lyWar ni
ngSi
gnal
s(EWS).
Joi
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Thesesignal
sinaloanaccountshoul
dimmedi
atel
y
putthebankonalertr
egar
dingaweaknessor
wrongdoingwhichmayulti
matelytur
noutt
obe
fr
audulent
.

Fai
rPr
act
icesCode:
RBIhasissuedgui
del
inesonf
airpr
act
icescodef
or
l
ending.
Thesearet
obecompul
sor
il
yfol
lowedbyal
lbanks
i
nIndia.
Thesegui
del
inesper
tai
nto:
(
a)appl
icat
ionf
orl
oansandt
hei
rpr
ocessi
ng
(
b)l
oanappr
aisalandt
erms/
condi
ti
ons
(
c)di
sbur
sement
sofl
oans
(
d)postdi
sbur
sementsuper
visi
on
(2)generalguideli
nesrel
ati
ngtodiscr
iminat
ion
basedonsex, casteandrel
igi
on,
harassmentin
recover
y,transfer/
takeov
erofaccounts,
etc.
Joi
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Banki
ngCodesandSt
andar
dBoar
dofI
ndi
a(BCSBI
):
TheBanki
ngCodesandStandar
dBoardofIndi
a
(BCSBI
)hasfor
mulat
edaCodeofBank's
CommitmenttoMi
croandSmallEnt
erpr
ises.
Thi
sisav
olunt
aryCode.
Thissetsminimum standar
dsofbanki
ngpr
act
ices
forbankstofoll
owwhent heyar
edeali
ngwi
th
MicroandSmal lEnt
erpri
ses(MSEs)
.
Joi
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ABM MODULE-D
Chapter26:
OVERVI
EW OFCREDI
T
MANAGEMENT(PART-
II
I)
Whatwewi
llst
udy?
*
Whati
sPr
ior
it
ySect
or?
*
Whati
sMSMEAct2006?

MSMEDAct2006: TheMSMEDAct ,2006has


modifiedthedefi
niti
onofmicro,smallandmedium
enter
pr i
sesengagedi nmanufact
uri
ngor
productionandprovidi
ngorrenderi
ngofserv
ices.

MSMENewl
imi
tsannouncedon13-
05-
2020:
Ol
dli
mit
s:
Joi
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I
ndust
ry Manuf
act
uri
ng Ser
vice
Mi
cro Upt
o25Lac Upt
o10Lac
Smal
l 25Lac+t
o5Cr 10Lac+t
o2Cr
Medi
um 5Cr+t
o10Cr 2Cr+t
o5Cr

Newl
imi
ts:
Manuf
actur
ing& I
nvest
ment Tur
nov
er
Serv
ice
Mi
cro Upt
o1Cr Upt
o5Cr
Smal
l Upt
o10Cr Upt
o50Cr
Medi
um Upt
o20Cr Upt
o100Cr

Commonguidel
ines/
inst
ruct
ionsf
orl
endi
ngt
o
MSMEsect
or:
Col
lat
eral:Banksaremandatednottoaccept
col
lat
eralsecur
it
yinthecaseofloansuptoRs.10
l
akhextendedtounitsi
ntheMSEsect or.(
canbe
ext
endedupt oRs.25lakhift
rackrecor
disgood)
Joi
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CompositeloanAcomposit
eloanlimitofRs.
1
cror
ecanbesanct i
onedbybankstoenablethe
MSEentrepreneur
stoavai
lofthei
rwor ki
ngcapit
al
andter
ml oanrequir
ementt
hroughSingleWindow.
Credi
tLinkedCapitalSubsi
dyScheme( CLSS)
GovernmentofIndia,Mini
str
yofMi cr
o,Smal land
Medium Enterpr
iseshaslaunchedCr edi
tLinked
Capit
alSubsidyScheme( CLSS)f orTechnology
Upgradati
onofMi croandSmal lEnterpr
isesfor
l
oansupt oRs.1cr ore.Therateofsubsi dyis15%.

Pr
ior
it
ySect
or:
Themainsect
ors,
incl
udedi
nthepr
ior
it
ysect
orar
e
asfol
lows:
1-
Agr
icul
tur
e 2-MSME
3-
Expor
tCr
edi
t 4-
Housi
ng
5-
Educat
ion 6-
Soci
alI
nfr
ast
ruct
ure
7-
Renewabl
eener
gy8-
Other
Joi
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Tar
getf
orPr
ior
it
ySect
or:
Cat
egor
y Schedul
edCommer ci
al
Banks&for
eignbanks
wit
h20&Abov ebranches
Tot
alPr
ior
it
ySect
or 40%
Agr
icul
tur
e 18%
Small&Mar
ginal -
--
far
mers
WeakerSect
ion -
--
Mi
croEnt
erpr
ises 7.
5%

*For
eignbankwithl
essthan20brancheshav
eonl
y
onetargetofov
eral
lPr
iori
tySect
orof40%.
(Figur
esaregivenaspercentofAdj
ustedNetBank
Credit(ANBC)orcredi
tequi
val
entamountofOff-
BalanceSheetExposure(
CEOBE),whi
cheveri
s
higher)
Joi
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Fi
nanci
alYear Smal l& WeakerSect
ion
Mar
ginalfar
mer Target
2020-
21 8% 10%
2021-
22 9% 11%
2022-
23 9.
5% 11.
5%
2023-
24 10% 12%

Mai
nSect
ors:
1.Agr
icul
tur
alf
inance
2.Fi
nancet
omi
cro,
smal
landmedi
um ent
erpr
ises
(MSMEs)
2a.KhadiandVi l
lageIndustr
iesSector(KVI)
:All
advancesgr antedt ounit
sintheKVIsect or
,are
coveredunderpr iori
tysectoradvancesandar e
el
igibleforconsiderati
onunderthesub- t
argetof
7.5%pr escr
ibedf ortheMicroenterpri
sessegment
withintheprior
itysector.
Joi
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2b.Over
dr af
tsext
endedbybanks,upto10,
000/-
underPradhanMantriJanDhanYojana(PMJDY)
account
s

3.Housi
ngf
inanceLoans:
MetroAr
ea:Maxi
mum l
oan35Lac(
Maxcostof
house45Lac)
Ot
herAr
ea:
Maxi
mum l
oan25Lac(
Maxcost30Lac)
Met
roar
ea:Popul
ati
onof10Lac&Abov
e
Thehousi
ngl
oanst
obanks'
ownempl
oyeeswi
llbe
excl
uded.
Loansf
orr
epai
rs:
Met
ro:10Lac
Ot
her:6Lac
4.Educati
onall
oans:Loanst oi
ndivi
dual
sf or
educati
onalpurposesi
ncludi
ngvocati
onalcourses
upto20lakhirr
especti
veofthesancti
onedamount
wil
lbeconsideredaseli
gibl
eforpri
ori
tysector
.
Joi
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5.Expor
tcr
edi
t.
6.Soci
alI
nfr
ast
ruct
ure:
Bankl oansuptoalimitof10cr oreperbor
rowerfor
buil
dingsociali
nfr
astructureforact
ivi
ti
esnamely
schools,heal
thcarefacil
iti
es,dri
nki
ngwater
faci
li
tiesandsanit
ati
onf acil
it
ies.
7.Renewabl
eEner
gy:
Bankloansuptoali
mi tof30croretoborr
owersf
or
purposesl
ikesol
arbasedpowergenerators,
bi
omassbasedpowergener ators.
Fori
ndi
vi
dualhousehol
ds,
thel
oanl
imi
twi
llbe10
l
akhperbor
rower.
8.Ot
her
s
8a.Loansnotexceedi ng1,00,000/-perbor r
ower
provideddi r
ectl
ybybankstoi ndi
viduals,provi
ded
theindividualborr
ower'
shouseholdannuali ncome
i
nr uralareasdoesnotexceed1, 00,000/-andfor
non-ruralareasitdoesnotexceed1, 60,
000/-.
8b.Loanst
odi
str
essedper
sonsnotexceedi
ng
Joi
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2,
00,
000/-perborr
owert
opr
epayt
hei
rdebtt
onon
i
nsti
tut
ionall
ender
s.
Theweakersecti
onsunderpr
ior
it
ysect
ori
ncl
ude
thef
oll
owing:
(Target10%)
i
.SmallandMar
ginalFar
mer
s.(
Landhol
dingupt
o2
hect
are)
i
i.Ar
ti
sans,vi
ll
ageandcot
tageindust
ri
eswhere
i
ndiv
idualcr
editl
imi
tsdonotexceed1lakh.
i
ii.Benefi
ciar
iesunderGov ernmentSponsored
SchemessuchasNat i
onalRur alLi
vel
ihood
Mi ssi
on(NRLM) ,Nat
ionalUrbanLi v
eli
hoodMissi
on
(NULM)andSel fEmploymentSchemef or
Rehabili
tat
ionofManualScav engers(SRMS).
i
v.Schedul
edCast
esandSchedul
edTr
ibes.
v.Benef
ici
ari
esofDi
ff
erent
ialRat
eofI
nter
est(
DRI
)
scheme.
v
i.Sel
fHel
pGr
oups.
v
ii
.Distr
essedf
armer
sindebt
edt
onon-
inst
it
uti
onal
l
enders.
Joi
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v
ii
i.Di
str
essedpersonsothert
hanf ar
mers,with
l
oanamountnotexceedingRs1l akhperborr
ower
t
oprepaythei
rdebttonon-i
nst
ituti
onall
enders.
i
x.I
ndiv
idualwomenbenef
ici
ari
esupt
o1l
akhper
bor
rower.
x.Per
sonswi
thdi
sabi
li
ti
es.
xi
.Over
draf
tsupto10,
000/-underPradhanMant
ri
Jan-
DhanYojana(PMJDY)accounts.
xi
i.Mi
nor
it
ycommunit
iesasmaybenot
if
iedby
Gover
nmentofI
ndi
afr
om ti
metoti
me.
Commongui
del
inesf
orpr
ior
it
ysect
orl
oans
Servi
cechargesNol oanrel
atedandadhocser
vice
charges/
inspecti
onchargesshouldbel
evi
edon
pri
orit
ysectorloansupto25,000.
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ABM MODULE-D
Chapt
er27:
ANALYSI
SOFFINANCI
AL
STATEMENTS
Whatwewi
llst
udy?
*
Whati
sfi
nanci
alst
atement
?
*
Whoar
euser
soff
inanci
alst
atement
?
*
Whati
sLegalPosi
ti
onoff
inanci
alst
atement
?

I
NTRODUCTI
ON:
Whenev erabankconsi dersal
oanproposal
,apar
t
fr
om thei ntegr
it
yandKYCaspect s,
ithasakeen
i
nterestinknowi ngthefi
nanci
aldet
ail
softhe
prospecti
v eborrower.
Theext
entoft
hesedetai
lsdependsuponthety
pe
ofl
oan,t
ypeofbor
rower,pur
poseoftheloanet
c.
Incaseofsecurit
ybasedlendingl
ikeloansagainst
f
ixeddeposi
ts,shareset
c,thesefi
nancialdet
ail
s
Joi
nCAI
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maybef
ewormaynotber
equi
redatal
l.
But
, i
nallcases,
suchdet
ail
sareinv
ari
abl
y
col
lectedwithaviewt
oassessi
ngthefol
lowi
ng:
(
a)TheNetWor
thoft
heAppl
icant
:
Foranindiv
idual
,theexcessofhi
sasset
sov
erhi
s
l
iabi
li
ti
esishisnetworth.
Thesamet hi
ngappl iest oanybusi nessentityas
wellbut,pr
imaf acie,it
sf inanci
alstatementshows
assetsandl i
abili
tytobeequalasbusi nessis
consider
edt obesepar atelegalentit
yandi tsnet
worthisaddedt ol i
abil
itiesconsideringthatthi
sis
theamountpay abletot hepr omotersbyt he
businessentit
y.
Thenetworthofanapplicanthel
psthebanki
n
deci
dingthelevelofact
ivi
tywhichmaybedesirabl
e
bythatappl
icantandtheamountofmoneywhi ch
canbelenttohim.
Joi
nCAI
IBWI
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(
b)Repay
mentCapaci
ty:
Incaseofani ndivi
dual,thebankcol lects
i
nformationli
kehisi ncome( sal
ary,inter
est,
divi
dend,etc.
)asal sohisexpendi t
ur e,i
ncludi
ng
repaymentsofexist i
ngborrowings, ifany,to
assessthesur pl
usav ail
ableforrepay mentof
i
nstall
mentandi nterestonbank'sl oan.
Incaseofabusi
nessent
erpr
ise,
thi
sinfor
mat
ioni
s
avai
labl
efr
om it
sfi
nanci
alst
atements.
(
c)Vi
abi
li
ty:
Bankloanmayormaynotr
esul
tini
ncr
eased
ear
ningsforabor
rower
.
Forexample,aloanf
orconsumerdur abl
eswi
llnot
i
ncreasetheincomewhileahomel oanmayresult
i
nincreasedincomefrom r
entorr
educed
expendi
turebywayofsav i
ngsonrent.
Incaseofabusinessent
erpr
ise,
bankloanis
normall
yint
endedtoincr
easetheincomelevel
.A
scrut
inyoft
hefinanci
alr
ecor
dsoft heexi
sti
ng
Joi
nCAI
IBWI
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acti
vit
yhelpsbankinassessi
ngwhethert
he
proposedbankloanwil
lresul
tinav
iablei
ncr
ease
i
noper at
ionsornot.

(
d)Av
ail
abi
li
tyofUnencumber
edSecur
it
ies:
Incaseofi ndividual
s, wherenor mall
ynof ormal
statementsoft heirf
inancialpositi
onareav ai
lable,
thebankasksquest ionstof i
ndoutaboutt heir
assets,l
iabil
it
ies,sourcesofi ncome,expenditure,
termsofr epaymentofexi stingloans,needforthe
l
oan, useofthel oan,etc.
,toaddr esstheabov e
ment i
onedquest i
ons.
Incaseofotherappl
icants,
suchi nformati
onis
normall
yavail
ablefr
om thefinancialstat
ements,
whichtheyarerequi
redtoprepareaspert hel
aw.
Thest atutoryprovisi
onsregardi
ngpreparat
ionand
auditoff i
nancialstatementsaremostlyappli
cabl
e
tocorpor ateentit
iesbuttheseprov
idethe
dir
ectionst othenon- cor
porat
eentit
iesaswel l
.
Joi
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WHI
CHARETHEFI
NANCI
ALSTATEMENTS:
Therear
ebasical
lytwofinanci
alstat
ementswhich
ever
ybusinessenter
pri
seisrequir
edtoprepar
e.
Theseare:
(
a)Bal
ancesheet
(b)Prof
it&Lossaccount(I
ncome&Expenditur
e
stat
ementincaseofnon-prof
itor
gani
zat
ions)
Apartfr
om t
hese,theaudi
tors'r
eport
,explanator
y
schedul
esandnotesonaccount s,
ifappli
cable,
provi
deusef
ulinf
or mat
iontothebankers.
Af undsfl
owst atementalsoprovi
desusef ul
i
nf ormati
onbut ,t
hisi
sonlyamat hemat i
cal
analysi
sofchangesi nthestruct
ureoftwo
consecutivebalancesheetsandcanbeeasi l
y
preparedbythebanker /anal
ysthimselfi
ft hebasi
c
statements,i
.e.thebal
ancesheets,areavai l
abl
e.
Account
ingStandard-
3makesitmandatoryfor
someenterpr
isestoprepar
eCashFlowstatement
fort
heaccountingper
iod(t
heseent
erpr
isesare
Joi
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thosewhoseequi tyordebti slist


edorisinthe
processofbeingl i
stedonar ecogni
zedstock
exchangeandal soal lothercommer ci
al,
industri
al
andbusi nessenterpriseswhoset ur
noverforthe
accountingperi
odexceedsRs.50cr or
e.These
enterpri
sesarealsor equiredtodosegment -
wi se
reporti
ngasperAS- 17).
USERSOFFI
NANCI
ALSTATEMENTS
Apartf
rom banker
s,t
heot
heruser
soff
inanci
al
st
atementsare:
(
a)Ot
hercr
edi
tor
sandl
ender
s
(
b)I
nvest
ors
(
c)Gov
ernmentagenci
es
(
d)Rat
ingagenci
es
(
e)Cust
omer
s
(
f)Empl
oyees
(
g)Gener
alpubl
ic(
h)anal
yst
s
Joi
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BASI
CCONCEPTSUSEDINPREPARATI
ONOF
FI
NANCI
ALSTATEMENTS:
Thei
mpor
tantconcept
sar
easunder
:
Ent
it
yConcept
MoneyMeasur
ementConcept
St
abl
eMonet
aryUni
tConcept
Goi
ngConcer
nConcept
CostConceptConser
vat
ism Concept
DualAspectConcept
Account
ingPer
iodConcept
Accr
ualConcept
Real
isat
ionConcept
Mat
chi
ngConcept
Joi
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LEGALPOSI
TIONREGARDI
NGFI
NANCI
AL
STATEMENTS
(
a)For
mat
:
TheCompani esAct2013hasprescr
ibedthe
for
mat sofbothbal
ancesheetandProfi
t&Loss
account.
Earli
er,
formatofonl
ythebal
ancesheetwas
prescri
bed.
TheCompani esAct2013menti
onst
hef
oll
owi
ngi
n
respectoff
inanci
alst
atement
s.
Thefi
nanci
alstat
ementsshallgiv
eat rueandf air
vi
ewofthestateofaff
air
soft hecompanyor
compani
es,complywiththeaccountingstandar ds
not
ifi
edundersect
ion133andshal lbei ntheform
orfor
msasmaybepr ovi
dedfordifferentclassor
cl
assesofcompaniesinScheduleIII
.
Joi
nCAI
IBWI
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(
b)Account
ingPer
iod:
AsperI
ncomeTaxrul
es,Apr
il
-Marchi
sconsi
der
ed
ast
hefi
nanci
aly
earfort
axpurposes.
Toali
gnwiththeprov
isionsoftheIncomeTax
Rul
es,i
ntheCompani esAct2013al so,
Ithasbeen
def
inedastheperi
odendi ngonthe31stdayof
Marchever
yyear.
(
C)Fori
ncompl
etePr
oject
s/noAct
ivi
ty:
Everycompanyhastoprepar
ethefi
nanci
al
stat
ementsevenift
hereisnoact
ivi
tydur
ingthe
accounti
ngperi
odortheproj
ecti
snotcompleted.

(
d)Consol
idat
edf
inanci
alst
atement
s:
The2013Actmandat esconsol i
datedf i
nanci
al
statementsforallcompani eshav i
ngasubsi di
aryor
anassociateoraj ointventur
e, t
opr epareand
presentconsoli
datedf i
nancialstatement si
n
additi
ontostandal onef i
nancialstatements.
Joi
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ABM MODULE-D
Chapt
er27:ANALYSI
SOFFINANCI
AL
STATEMENTS(PART-
II
)
Whatwewi
llst
udy?
*
Whati
sbal
ancesheet
?
Joi
nCAI
IBWI
THASHOKonYouTube
BALANCESHEET:
Itisast at
ementofasset
s(whatisowned,
and
l
iabil
it
ies(whati
sowedt oot
hers)ofanent
it
yata
parti
cularmoment.
Asset
s:Whatf
ir
m owns
Li
abi
li
ty:
Whatf
ir
m owes
Iti
sli
keasnapshotofassetsandliabi
li
ti
esandjust
asonepict
uremaybedi ffer
entfr
om anothert
aken
anyti
meearli
er,t
hebalancesheetmayalsobe
dif
fer
entatdif
ferentmomentsofthesameday .
Theref
ore,ever
ybal
ancesheetmustindi
cat
ethe
dateattheendofwhichi
tisprepar
ed.
Nor
mal l
y,thebalancesheeti
sprepar
edatt
heend
oft
heaccount i
ngperiodforwhi
chtheP&Laccount
i
sprepared.
P&Laccounti
spr
epar
edf
oraper
iod.
Bal
anceSheeti
spr
epar
edf
orapar
ti
cul
ardat
ei.
e
asonadate.
Joi
nCAI
IBWI
THASHOKonYouTube
For
matofBal
anceSheet:

LI
ABI
LITI
ES(
Sour
ceoff
und)ASSETS(
Useoff
und)
Longt
erml
iabi
li
ti
es Cur
rentAsset
s
Cur
rentl
iabi
li
ti
es Fi
xedAsset
s
Networ
th I
ntangi
bleAsset
s
NonCur
rentAsset
s
Tot
al== ==Tot
al

Footnot
e Cont
ingentLi
abi
li
ty
BankGuar
ant
ee Let
terofcr
edi
t

Asset
s:
1-Cur
rentAsset
s2-
NonCur
rentAsset
s
3-
FixedAsset
s4-I
ntangi
bleAsset
s
Joi
nCAI
IBWI
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1-
Cur
rentAsset
s:
Thoseasset
swhichareli
kelyt
obeeither
consumedorconvert
edint
ocashwithin1year
fr
om thedat
eofbalancesheetar
ecall
edCurrent
Assets.
Exampl
e:
1-
BankBal
ance 5-
Debt
ors
2-
Inv
ent
ory
/st
ock 6-
Accr
uedI
ncome
3-
Cash 7-
PrepaidExpenses(I
nsur
ance,
AdvanceTax,AdvanceRent)
4-
Bil
lRecei
vabl
e

2-
Int
angi
bleAsset
sorFi
cti
ti
ousAsset
s:
Theassetswhichdonothavephy
sicalexi
stence
arecal
ledInt
angibl
eAsset
s.
Ex-
(
a)Goodwi
ll
,(b)Br
ands/
trademar
ks,
(
c)Comput
ersof
twar
e,(
d)Mi
ningr
ight
s,
Joi
nCAI
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(e)Copyr
ight
s,andpat
ent
sandot
heri
ntel
lect
ual
proper
tyri
ghts,
3-
FixedAsset
s:(
netbl
ock)
(t
angi
bleasset
s:whi
chcanbet
ouched)
Thoseasset
swhi
chwi
llbeusedf
orl
ongoft
ime.
OrThoseasset
swhi
char
enotmeantt
obesol
d.
(
a)Land, (
b)Bui
ldi
ngs,
(
c)Pl
antandEqui
pment
,(d)Fur
nit
ureandFi
xtur
es,
(
e)Vehi
cles,

4-
NonCur
rentAsset
s:
Thoseasset
swhi
chcannotbecl
assi
fi
edas
Ei
therf
ixedasset
s
Orcur
rentasset
s
OrI
ntangi
bleasset
s
Ar
ecal
ledNoncur
rentAsset
s.
Joi
nCAI
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Li
abi
li
ty:
1-
Longt
erml
iabi
li
ty
2-
Cur
rentl
iabi
li
ty
3-
Networ
th

1-
Cur
rentLi
abi
li
ty:
Amountpayabl
etooutsiderWITHI
N1y earfrom t
he
dat
eofbalancesheeti
scalledCur
rentl
iabi
li
ty.
Exampl
e:
1-
Inst
all
ment
soft
erml
oanpay
abl
ewi
thi
noney
ear
.
2-
Bil
lspay
abl
e
3-
Sundr
yCr
edi
tor
s
4-
Prov
isi
onf
ort
ax
5-
Out
standi
ngexpenses
6-
BankBor
rowi
ngi
nfor
m ofCCandOD
Joi
nCAI
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2-
Longt
erml
iabi
li
ty:
Amountpayabl
etooutsiderAFTER1yearfr
om the
dat
eofbalancesheeti
scalledl
ongter
ml i
abil
it
y.
Exampl
e:
1-
Unsecur
edLoan
2-
Debent
ures(
whi
char
emat
uri
ngaf
ter12mont
hs)
3-
Ter
mloan
(
inst
all
mentwhi
char
epay
abl
eaf
ter1y
ear
)

3-
Networ
thorOwner
'sEqui
ty:
Amountcontr
ibut
edbyOwner+Profi
tret
ainedi
n
thebusi
nessi
scalledt
henetwor
th.
Exampl
e:
1-
Capi
talorshar
ecapi
tal
2-
Reser
vesandsur
plus
3-
Shar
epr
emi
um
Joi
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Exampl
e:
Capi
tal=500Cr
St
ock=100Cr
Fur
nit
ure=50Cr
Ter
mloan=400Cr
Goodwi
ll
=40Cr
Debt
ors=100Cr
Cr
edi
tor=400Cr
I
dent
if
yasset
s&l
iabi
li
ty?

LI
ABI
LITI
Y ASSET
Capi
tal St
ock
Ter
mloan Fur
nit
ure
Cr
edi
tor
s Goodwi
ll
Debt
ors
Joi
nCAI
IBWI
THASHOKonYouTube

A-
Findcur
rentasset
s?
B-Fi
ndcur
rentl
iabi
li
ty?
C-
FindI
ntangi
bleAsset
s?
D-
FindFi
xedAsset
s?
E-Fi
ndNetwor
th?
F-
Findl
ongt
erml
iabi
li
ty?
Sol
uti
on:
A-
Cur
rentAsset
s:St
ock,
Debt
ors=100+100=200Cr
B-Cur
rentLi
abi
li
ty:
Credi
tor
s=400Cr
C-
Int
angi
bleAsset
s:Goodwi
ll=40Cr
D-
FixedAsset
s:Fur
nit
ure=50Cr
E-
Networ
th=capi
tal+r
eser
ve+Shar
ePr
emi
um
=500Cr
F-
Longt
erm Li
abi
li
ty:Ter
m Loan=400Cr

Thanks
Joi
nCAI
IBWI
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ABM MODULE-D
Chapt
er27:ANALYSI
SOFFINANCI
AL
STATEMENTS(PART-
II
I)
Whatwewi
llst
udy?
*
Whati
sRat
ioAnal
ysi
s?
Whati
sCur
rentRat
io?
*
Whati
sQui
ckRat
io?

TECHNIQUESUSEDI
NANALYSI
SOFFI
NANCI
AL
STATEMENTS:
Banker
smost l
yusethr
eemet
hodsf
oranal
ysi
sof
fi
nanci
alst
atements
(
a)FundsFl
owAnal
ysi
s
(
b)Tr
endAnal
ysi
s
(
c)Rat
ioAnal
ysi
s
Joi
nCAI
IBWI
THASHOKonYouTube
Rat
ioAnal
ysi
s:
Thisisthemostfavouri
temethodofbanker
sfor
analy
sisoffi
nancialst
atements.
Arati
oiscompar i
sonoftwof i
guresandcanbe
expr
essedasaper cent
age(e.g.,pr
ofit
abil
it
yis23.7
percent
),asanumber( e.
g.,
currentrati
ois1.33)or
si
mplyasapr oport
ion(e.
g.,
debtequi t
yis1:2).
Boththefi
gures,
usedincal
cul
ati
onofar at
io,
can
befrom ei
therP&Laccount
,orbal
ancesheetorone
canbefrom P&Laccountandtheotherf
rom
bal
ancesheet.
Ratioshelpincomparisonoft hefinanci
al
performanceandf i
nancialposit
ionofanent i
tywi
th
otherenti
ties,
asalsoforcompar i
sonwithit
sown
statusovertheyears.

Whil
ediff
erentusersoffi
nancialstatementsar
e
i
nter
estedindif
ferentr
ati
os,theratioswhich
i
nter
estabankermost ,ar
ethef oll
owi ng:
Joi
nCAI
IBWI
THASHOKonYouTube
(
A)Pr
ofi
tabi
li
tyRat
ios
1‐
Oper
ati
ngPr
ofi
tMar
gin
2‐
NetPr
ofi
tMar
gin
(
B)Li
qui
dit
yRat
ios:
1‐
Cur
rentRat
io
2-
Qui
ckRat
ioorAci
dtestr
ati
o
(
C)Capi
talSt
ruct
ureRat
ios
1-
DebtEqui
tyRat
io
(
D)Rati
osIndi
cat
ingAbi
li
tyt
oSer
viceI
nter
estand
I
nst
alment
s
1-
DebtSer
viceCov
erageRat
io
(
E)Tur
nov
erRat
ios
1-
Debt
orTur
nov
erRat
io

Li
qui
dit
yRat
ios:
1‐
Cur
rentRat
io
2-
Qui
ckRat
ioorAci
dtestr
ati
o
Joi
nCAI
IBWI
THASHOKonYouTube
1‐Cur
rentRat
io(
CR):

CR=Cur
rentasset
s/Cur
rentl
iabi
li
ti
es
CR=CA/
CL
*
Ideal1.
33:
1
*
Cur
rentRat
ioi
ndi
cat
esFi
nanci
alSt
abi
li
tyoff
ir
m
or
Abi
li
tyoff
ir
mtopaycur
rentl
iabi
li
ti
es.

2‐Qui
ckRat
io(
CR):
(Aci
dtestr
ati
o)

CR=Qui
ckasset
s/Cur
rentl
iabi
li
ti
es
CR=QA/
CL
QuickAsset=Cur
rentasset
s‐I
nvent
ory&pr
epai
d
expenses
*
Ideal1:
1
Joi
nCAI
IBWI
THASHOKonYouTube
Capi
talSt
ruct
ureRat
ios:

1-
DebtEqui
tyRat
io:
Long-
ter
mli
abi
li
ti
es/
Tangi
bleNetWor
th

Tangi
bleNetWor
thi
sal
socal
ledShar
ehol
der
sfund

Tangi
bleNetWor
th=NetWor
th‐I
ntangi
bleAsset
s

NetWort
h=Capi
tal+Reser
ves+Sur
plus+shar
e
pr
emium
DebtEqui
tyRat
ioindi
cat
esOwnersstakeint
he
busi
nesscomparedtost
akeofoutsi
ders.
*
Idealr
ati
oshoul
dbe1:
1but2:
1isal
soaccept
abl
e.
Joi
nCAI
IBWI
THASHOKonYouTube
Quest
ion:
Capi
tal=1000Cr
Debt
ors:500Cr
Cr
edi
tor
s:200Cr
St
ock:
100Cr
Pr
ovi
sionf
ort
ax:600Cr
Ter
mloan:
2000Cr
Goodwi
ll
:300Cr

Nowcal
cul
ate
1Cur
rentRat
io
2Qui
ckRat
io
3DebtEqui
tyRat
io
Sol
uti
on:
1‐
Cur
rentRat
ioCR=CA/
CL
Cur
rentAsset
s(CA):Debt
ors+St
ock
=500+100=600
Joi
nCAI
IBWI
THASHOKonYouTube
Cur
rentl
iabi
li
ti
es=Cr
edi
tor
s+Pr
ovi
sionf
ort
ax
=200+600=800
CR=CA/
CL=600/
800=3:
4
2‐Qui
ckRat
io=Qui
ckAsset
s/Cur
rentl
iabi
li
ti
es
QR=QA/
CL
QA=Curr
entasset
s–I
nvent
ory&pr
epai
dexpenses
QA=600‐
100=500
CL=800
QR=500/
800=5:
8
3-DebtEqui
tyRat
io=
Long-
ter
mli
abi
li
ti
es/
Tangi
bleNetWor
th
Long-
ter
mli
abi
li
ti
es(
Ter
m Loan)
=2000Cr
Tangi
bleNetWor
th=NetWor
th‐I
ntangi
bleAsset
s
I
ntangi
bleAsset
s(Goodwi
ll
)=300
NetWor
th=Capi
tal+Reser
ves+Sur
plus=1000
DER=LTL/
Int
angi
bleNW =2000/
1000=2:
1
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er27:ANALYSI
SOFFINANCI
AL
STATEMENTS(PART-
IV)
Whatwewi
llst
udy?
*
Whati
sDebtSer
viceCov
erageRat
io?
Whati
sInv
ent
oryTur
nov
erRat
io?
*
Whati
sDebt
orTur
nov
erRat
io?

(
A)Pr
ofi
tabi
li
tyRat
ios
1‐
Oper
ati
ngPr
ofi
tMar
gin
2‐
NetPr
ofi
tMar
gin
(
B)Li
qui
dit
yRat
ios:
1‐
Cur
rentRat
io
2-
Qui
ckRat
ioorAci
dtestr
ati
o
(
C)Capi
talSt
ruct
ureRat
ios
1-
DebtEqui
tyRat
io
Joi
nCAI
IBWI
THASHOKonYouTube

(
D)Rati
osIndi
cat
ingAbi
li
tyt
oSer
viceI
nter
estand
I
nst
alment
s
1-
DebtSer
viceCov
erageRat
io
(
E)Tur
nov
erRat
ios
1-
Inv
ent
oryTur
nov
erRat
io
2-
Debt
orTur
nov
erRat
io

Rat
iosIndi
cat
ingAbi
li
tyt
oSer
viceI
nter
estand
I
nstal
ments
1-
DebtSer
viceCov
erageRat
io:
DSCR=( Pr
ofitaft
erTax+Depreciat
ion+I
nter
eston
termloan)/(
Annual i
nstal
lmentofter
mloan
+Int
erestont er
ml oan)
DSCR=(
PAT+Dep+i
nter
est
)/(
inst
alment+i
nter
est
)
*
Iti
susedf
orsect
ionoft
erml
oan
*DSCRIndi
cat
estheabi
li
tyofaf
ir
mtopayTer
m
LoanI
nstal
mentsonti
me.
Joi
nCAI
IBWI
THASHOKonYouTube

Exampl
e:
Depr
eci
ati
on=10Cr
Pr
ofi
taf
tert
ax=20Cr
Annuali
nst
all
ment=5Cr
I
nter
estont
erml
oan=20Cr
Cal
cul
ateDSCR?
Sol
uti
on:
DSCR=PAT+DEP+I
NT/I
NSTAL+I
NT
=20+10+5/
20+5=35/
25=7:
5
Joi
nCAI
IBWI
THASHOKonYouTube

Tur
nov
erRat
ios

1-
Inv
ent
oryTur
nov
erRat
io:

I
TOR=COSTOFGOODSSOLD/
AVGI
nvent
ory

COSTOFGOODSSOLD=I nv
entoryinbegi
nni
ng-
i
nvent
oryatt
heend+goodspurchased+wages
Av
gInv
ent
ory=1/
2*(
invatbegi
nni
ng+i
nvatend)
Exampl
e:
I
nvent
oryatbegi
nni
ng=20000
I
nvent
oryatt
heend=12000
Wages=4000
Pur
chase=6000
Nowcal
cul
ateI
nvent
oryTur
nov
erRat
io?
Joi
nCAI
IBWI
THASHOKonYouTube

Sol
uti
on:
Costofgoodssol
d=I
nventor
yinbeginni
ng-
I
nventor
yatend+wages+purchase
=20000-
12000+4000+6000=18000
Av
gInv
ent
ory=(
Invatbegi
nni
ng+I
nvatend)
/2
=20000+12000=32000
I
nvent
oryTur
nov
erRat
io=
costofgoodssold/Av
gInv
ent
ory
=18000/32000=9:
16

2-
Debt
orTur
nov
erRat
io:

DTOR=CREDI
TSALES/
AVGACCOUNT
RECEI
VABLES
Cr
edi
tsal
es=Tot
alSal
e-CashSal
e
AccountRecei
vabl
es=Debt
ors+Bi
llRecei
vabl
es
Joi
nCAI
IBWI
THASHOKonYouTube

Exampl
e:
Tot
alsal
einy
ear2020=80000
Tot
alcashsal
einy
ear2020=20000
Bi
llRecei
vabl
esason1December=10000
Debt
orsason1December=40000
Bi
llRecei
vabl
esason30December=30000
Debt
orsason30December=50000Nowcal
cul
ate
Debt
ortur
noverr
ati
o?
Sol
uti
on:
Cr
edi
tSal
e=Tot
alSal
e-CashSal
e
=80000-
20000=60000
Bi
llRecei
vabl
es=30000+10000=40000
Debt
ors=40000+50000=9000
AvgaccountRecei
vables
=1/2*
(40000+90000)
=65000
DTOR=CREDI
TSal
e/Av
gAccountRecei
vabl
es
=60000/
65000=12:
13
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE-D
Chapt
er28:
WORKI
NGCAPI
TAL(
PART-
I)
Whatwewi
llst
udy?
*
Whati
sWor
kingCapi
tal
?
*
Whati
sWor
kingCapi
talCy
cle?

CONCEPTOFWORKI
NGCAPI
TAL:
Wheneverabusinessenter
prisei
sstart
ed,some
fi
xedassetsl
ikeoffi
ce,f
urni
ture,
machines
/computer
s,etc.
,dependi
ngupont heneed,ar
e
acqui
red.
Butthisal
onemaynotbesuf fi
cientforr
unningt
he
busi
nessoft hatenter
pri
se,
exceptf orafew
acti
vit
iesl
ikebroking/
commi ssi
onagent ,et
c.
Mostofthebusinessent er
pri
ses,
inthecour seof
t
heirbusi
ness,
hav etocar r
ysomecur rentassets
l
ikerawmateri
als,fi
nishedgoods,receivabl
es,et
c.
Joi
nCAI
IBWI
THASHOKonYouTube
Themoneyblockedi
nthesecur
rentasset
siscal
led
worki
ngcapi
tal
.
Letustakeexampl
eofanent
repreneurset
ti
ngupa
smallent
erpr
isef
ormanuf
act
uringofpolyt
hene
bags.
Hecompl
etest
heconstr
uct
ionoffact
oryshedand
put
supal
lthepl
antandmachiner
y.
Atthi
spoint,i
fhet
akesasnapshotofhi
sasset
s
andli
abi
li
ties,
itwi
llbeasunder
:
Bal
ancesheetofABCLt
dason9/
9/2017:
Li
abi
li
ti
es Asset
s
Capi
tal 25 Fi
xedAsset
s 100
Longterm 75
l
iabi
li
ti
es
Tot
al 100Lac Tot
al 100Lac
(
Rs.i
nlakh)
Joi
nCAI
IBWI
THASHOKonYouTube
Forrunni
ngthefact
ory,
heneedsr
awmat
eri
al,
i.
e.,
thepolyt
henegr
anules.
Hegoestothedeal
erandfi
ndsoutthatt
her
ateof
gr
anulesi
sRs.100perkgandcredi
tof3monthsi
s
av
ail
able.
Hi
srequi
rementi
s1000kg(
1ton)perday
.
Hepurchases30tonsofgranul
eswhi chist
he
mini
mum quanti
tywhichthedealersell
s.
Hest
art
smanuf
act
ureoft
hebagson11/
9/2017.
Theprocesst
akesv er
yli
tt
let
ime,
andonthe
eveni
ngof11/9/2017hehas1tonofbagswi
thhi
m.
Heincursacost(power,
labor,t
ransport
,misc
expenses,buti
gnori
ngdepreci
ation)ofRs.10000
forconver
ting1tonofgranul
esintobags.
Heappr
oachest
hewhol
esal
edeal
erofbagsf
or
sel
li
ngt
hebagstohi
m.
Thedeali
sstr
uckatRs.1,
10,
000pert
on,buta
mini
mum of10tonsofbagsi
stobesuppli
ed.
Joi
nCAI
IBWI
THASHOKonYouTube
Also,cr
editofonemont
hist
obegi
vent
othe
purchaser
.
So,theentr
epreneurconti
nuestomanuf actur
efor
10day sandon21/ 9/2017suppl
ies10tonsofbags
byraisi
nganinvoiceofRs.11lakh,pay
abl eon
21/
10/ 2017.
Thenextsuppl
ywi
llbemadeon1/
10/
2017.

Ev
ent
sDaybyDay
:
Pol
ytheneGr
anul
es 100Rs/
Kg
Need 1000Kg/
Day 1Lac
Total
order
(Pai
dto 30Tons 30Lac
suppl
ier
)
3mont
hscr
edi
t Avail
ablef
rom
suppli
er
St
artmar
kingbag 11/
09/
2017
Dai
lybagmade 1Ton
Bagsol
d 1.
10Lac/
Ton
Joi
nCAI
IBWI
THASHOKonYouTube
Total
bagsol
dat 10Ton 11Lac
once(mi
n)
Labourcharges, PerTonr
ate 10,
000
poweretc.
TotalLabour For10Ton 1Lac
charges(Expense)
Tot
alLabourt
il
l 2Lac
30/
09/2020
Tot
alday
stakento 10day
s
make10tonbag
10Tonsbag 21/
09/
2020
suppl
i
edon
Cr
editof1monthi
s Sopay
mentwil
l 21/
10/
20
gi
ventoPur
chaser ber
eceiv
edon
Totalamountt
obe Pur
chaser 11Lac
recei
vedfr
om
Joi
nCAI
IBWI
THASHOKonYouTube
Ifhet
akesasnapshotofhisasset
sandli
abil
it
ies
ontheeveni
ngof30/9/2017,t
hepict
urewil
lbeas
under
:
Bal
ancesheetofABCLt
dason30/
9/2017
Li
abi
li
ti
es Asset
s
Capi
tal 25 FexedAsset
s 100
LongTerm 75 RawMat
eri
al 10
Li
abil
it
ies 10Tons
Amount 30 Workin 0
Payabl
eto pr
ogress
Suppli
er
Expenses 2 Fi
nishedgoods 11
Payable 10t
ons
Amount 11
Recei
vabl
e
Tot
al 132Lac Tot
al 132Lac
Joi
nCAI
IBWI
THASHOKonYouTube
Theamountofr awmat eri
als,worki
npr ogress,
fi
nishedgoods,
andr eceiv
ables,t
otali
ngRs.32l akh,
i
scal l
edtheworki
ngcapi t
alorthecurrentassets
requir
edtoruntheenterpri
sesmoot hl
y.
Inthi
sexample,t
heentrepr
eneurhasnotarranged
foranymoneytorunhisfactoryashi
senti
re
requi
rementofworki
ngcapitalismett
hroughthe
credi
tprov
idedbythesuppli
er.
But,
li
fei
nbusiness,
oft
en,
isnotassi
mpl
eas
shownhere.
Iti
safactthatcur
rentassetsarer
equi
redby
almostever
yenterpr
isetorunthebusi
ness
smoothly
.
Howmuchofcurrentassetsar
erequi
redtobe
mai
ntai
neddependsont henat
ureofact
ivi
tyand
t
hemarketcondi
ti
ons.
Workingcapi
talfi
nancebyt hebanksisnothi
ngbut
assessmentoftotalcur
rentassetsneededand
howt hi
sneedistobemet .
Joi
nCAI
IBWI
THASHOKonYouTube
Intheaboveexample,
whathappensift
hecredi
tis
notavai
labl
efrom t
hesuppli
eror
,thecr
edi
tis
avail
abl
eonlyfor10days?
Thecr edi
tprov
idedtopurchasermaynotbe
reducedifthemarketpr
acticeisl
iket
hat
.
I
nsuchacase,
hewi l
lappr
oacht
hebankand
r
equestf
oraworki
ngcapit
all
oanofRs.32l
akh.
Assumingt
hatbankisconvincedaboutKYCnorms,
vi
abil
it
yofthepr
ojectet
c.,
thebankwi l
lassesst
he
needsandsanct
ionanamount .
Howmuchwi l
lbet
hatamount
,wewi
lldi
scussl
ater
i
nthechapt
er.
But,
bankwilldef
ini
tel
yaskhi
mt obri
ngsomeof
hi
sownmoneyei t
herbywayofcapi
talorlongterm
bor
rowingsli
kefi
xeddeposi
ts,l
oansfrom fr
iends
andrel
ati
ves.
Thi
samount,whichi
sint
endedt
omeetpartoft
he
worki
ngcapi
tal
,i
scall
edNetWorki
ngCapi
tal
.
Theot
herpartoft
heworkingcapi
talwi
llbemetby
cr
edi
tprov
idedbythesuppli
er,
othercr
edit
Joi
nCAI
IBWI
THASHOKonYouTube
av
ail
abl
e,andt
hebankf
inance.
Inshor t
,wecansayt hatthet ot
alrequirementof
currentassetsofanent er
prise,whichistermedas
Total orGr
osswor ki
ngcapi tali
smetbyshor tter
m
creditavai
labl
e(incl
udingbankf inance)andsome
amountar rangedbytheent erpr
iset hr
oughlong
termf unds(ei
thercapi
talorbor r
owi ngs),
call
edNet
Wor kingCapit
al.

WORKINGCAPI
TALCYCLE:(
Seet
hechar
tinnext
page)
Thenor maloper ati
onsofabusi nessent erpr
ise
consistofsomeoral loftheact ionslike,pur
chase
ofrawmat er
ials, processing/conversionofraw
material
sintof inishedgoods, sell
ingthesegoods
oncash/cr editbasi s,receivecashonsal eorend
ofcreditperi
odandagai npur chaser awmat eri
als.
Thi
siscal
ledwor
kingcapi
talcy
cle.
Thel
engt
hoft
hiscy
cledependson:
(
a)t
hest
ocksofr
awmat
eri
alsr
equi
redt
obehel
d.
Joi
nCAI
IBWI
THASHOKonYouTube
(
b)t
hewor kinprocess,whichinturndependson
t
heprocessinv
olvedinmanuf act
ur i
ng/pr
ocessi
ng
t
oconvertt
herawmat er
ial
sintofini
shedgoods.
(c)thecredi
trequi
redt
obepr
ovi
dedt
othe
purchasers.

Thelongertheworkingcapi
talcycle,
themorei
s
worki
ngcapi t
alr
equirement,
i.e.
,theneedf
or
maintai
ningthecurr
entassets.
Thecorrectassessmentofthi
scy cl
eist
hemost
i
mpor t
antpartinabank'sassessmentofgr
oss
worki
ngcapi t
al,networ
kingcapit
alandt
hebank
fi
nance.
Joi
nCAI
IBWI
THASHOKonYouTube
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er28:
WORKI
NGCAPI
TAL(
PART-
II
)
Whatwewi
llst
udy?
*
Whatar
ethemet
hodsf
orcal
cul
ati
ngW C?

WORKI
NGCAPI
TAL(
W.C.
):
WORKI
NGCAPI TAL:meansI
nvest
mentofaf
ir
min
i
t'
sCur
rentAsset
s.

Sour
cesf
orMeet
ingWor
kingCapi
talRequi
rement
:
(
1)OwnSour
ces(
NWC)
:
Thebalancesheetoft
helastaccount
ingy
ear
depi
ctstheposit
ionofav
ail
ableNWC.
Also,astheesti
mat eofli
mitsi
sbasedont he
project
edbalancesheetattheendofthecurrent
accountingyear
,therearesomeinter
nalaccr
uals
whicharealsotakenintoaccount
.
Joi
nCAI
IBWI
THASHOKonYouTube
Dependingont hedesiredcurr
entr at
iotobe
maintai
ned, bankmayst i
pulat
eaddi t
ionalNWCt o
bebroughtin, i
ftheavail
abl
eNWCandant i
cipat
ed
i
nternalaccrualsarenotconsideredenoughto
maintai
nt hedesiredcurr
entratio.
(
ii
)Suppli
ers'
Credit
:Est
imat
eoft
hisdependson
t
hemar ketpr
acti
ce.
(i
ii
)OtherCurr
entLiabi
li
ti
esli
kesal
ariesandother
expensespayabl
e,advancesfr
om customers,
etc.
(i
v)BankFinance

Cal
cul
ati
onofBankFi
nance:
Logi
cally,theneedforworki
ngcapi t
alfinancef r
om
thebanki sequaltothegapbet weentotalwor ki
ng
capi
talandt heavail
abil
it
yoffundsfrom allthe
sources,asment i
onedabove( ofcourse,excluding
bankfinance).

Theenter
priseorthebankmaynothavemuch
cont
rolonthe‘suppl
ier
s'cr
edi
t'or“
othercur
rent
Joi
nCAI
IBWI
THASHOKonYouTube
l
iabi
li
ti
es’
,asthesear
edr
ivenbymar
ketcondi
ti
ons
orbusi
nessneeds.
Butbankscanpr escri
betheamounttobebrought
i
nbyt heenterpr
isethroughi
tsownlongter
m
sour
cesi.e.
,theNWC.
Thiswasatthecor
eoftherecommendat
ionsofthe
erst
whil
eTandoncommi t
tee,whi
chdomi
natedthe
psycheoft
hebankersf
oral ongt
ime.
Thoughbanksar enowf r
eetofor
mulatetheirown
pol
iciesint
hisregard,
themethodsoflending,
mentionedthere,
sti
llf
indpl
aceinthecalculat
ions
fol
lowedbyt hebanks.
Thi
sisalsocal
ledPer
missi
bleBankFi
nance
Method(P.B.
F.M).
Thi
smet
hodwassuggest
edbyt
andoncommi
tt
ee.
Joi
nCAI
IBWI
THASHOKonYouTube
Themet
hodsar
e:
(
a)Fi
rstMet
hodofLendi
ng:
Undert his,theenterpri
sewasr equir
edt obri
ngin
NWCofatl east25per centofthewor ki
ngcapit
al
gap(tot alcurrentassetsminustotalcurrent
l
iabi
li
tiesexcl udingbankf i
nance).
*
OtherCur
rentLi
abi
li
ty(
OCL)
=CL-BankBor
rowi
ng

Worki
ngCapi
talGap=C.
A-C.
L(ot
hert
henbank
bor
rower
s)or
Wor
kingCapi
talGap=C.
A-O.
C.L

MARGI
N=25%ofWCGap
MPBF=WCG-Mar
gin
(
Bankwi
llf
inance=75%ofWCGap)
Expect
edcur
rentr
ati
o=1.
17:
1
Joi
nCAI
IBWI
THASHOKonYouTube
Incaseborrowerisnotabl
etobri
ngr equi
red
marginthenhemaybegi v
enwor ki
ngCapitalTer
m
Loan.ThisTer
m" worki
ngcapit
alter
ml oan"
suggestedbytandoncommi t
tee.
Exampl
e1:
CA=500Cr
CL=150Cr
BankBor
rowi
ng=50Cr
Nowcal
cul
ateMPBFasperFi
rstMet
hod?
Sol
uti
on:
WCG=CA-
OCL
OCL=CL-
BankBor
rowi
ng
OCL=150-
50=100Cr
WCG=500-
100=400Cr
NowMar
gin=25%ofWCG=400*
25%=100Cr
WORKI
NGCAPI
TALLi
mit
=WCG-
Mar
gin
=400-
100=300Cr
Joi
nCAI
IBWI
THASHOKonYouTube

Exampl
e2:
CA=1000Cr
CL=400Cr
BankBor
rowi
ng=200Cr
Nowcal
cul
ateMPBFasperFi
rstMet
hod?
Sol
uti
on:
WCG=CA-
OCL
OCL=CL-
BankBor
rowi
ng
OCL=400-
200=200Cr
WCG=1000-
200=800Cr
NowMar
gin=25%ofWCG=800*
25%=200Cr
WORKI
NGCAPI
TALLi
mit
=WCG-
Mar
gin
=800-
200=600Cr
Joi
nCAI
IBWI
THASHOKonYouTube
(
b)SecondMet
hodofLendi
ng:
Underthi
s,theent
erpr
isewasrequi
redtobringi
n
NWCofatl east25percentoft
hetotalcur
rent
asset
s.

MARGI
N=25%ofCA
MPBF=WCG-Mar
gin

Expect
edcur
rentr
ati
o=1.
33:
1

Exampl
e1:
CA=1000Cr
CL=400Cr
BankBor
rowi
ng=200Cr
Nowcal
cul
ateMPBFasperSecondMet
hod?
Joi
nCAI
IBWI
THASHOKonYouTube
Sol
uti
on:
WCG=CA-
OCL
OCL=CL-
BankBor
rowi
ng
OCL=400-
200=200Cr
WCG=1000-
200=800Cr
NowMar
gin=25%ofCA=1000*
25%=250Cr
WORKI
NGCAPI
TALLi
mit
=WCG-
Mar
gin
=800-
250=550Cr

(
c)Thi
rdMet
hodofLendi
ng:
Underthis,t
heenterpri
sewasr equiredtobri
ngin,
asNWC, 100percentofthosecurrentassetswhich
areconsidered'
coreassets'andatl east25per
centoftheremainingcurrentassets.
bi
li
ti
es.
Joi
nCAI
IBWI
THASHOKonYouTube
Exer
cise:
St
ock=500,
Debt
or,
=100,
bankBor
rowi
ng=300,
cr
edi
tor
s=400
Calcul
atebankli
mitorWorki
ngCapi
tall
imi
tasper
fi
rstandsecondmethod?
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE-D
Chapt
er28:
WORKI
NGCAPI
TAL(
PART-
II
I)
Whatwewi
llst
udy?
*
Whati
sTur
nov
erMet
hod?
Whati
sCashBudget
Met
hod?

METHODSTOCALCULATEWORKI
NGCAPI
TAL
REQUI
REMENT:

2-
TURNOVERMETHOD:
Thi
smet
hodwassuggest
edbyNay
akcommi
tt
ee.
Underthismet hodofwor ki
ngcapitalassessment,
i
tisassumedt hatt
heent er
priseneeds25%ofi t
s
annualturnoverasgrosswor kingcapi
tal,
outof
which20%wi l
lbeprovidedbyt hebankand5%wi ll
bebroughti nasmarginbyt heenterpri
se.
Joi
nCAI
IBWI
THASHOKonYouTube
Forloansandadv
ancestoMicr
oandSmall
Enterpr
ises(
MSES),
RBIgui
deli
nesar
easunder
:
‘
Banksareadv i
sedtograntwor ki
ngcapi
talcredit
l
imit
stoMi croandSmal lEnt
erpri
ses(MSES)
computedont hebasisofminimum 20%oft heir
est
imatedannualturnoverwhosecredi
tli
mitin
i
ndivi
dualcasesisuptoRs.5cr or
e.
'
TheRBIgui
del
inesmayr esul
tinunder
-fi
nanci
ng
f
ort
hoseuni
tswher etheworki
ngcapit
alcycl
eis
mor
ethan3mont hs.
Therefor
e,t
hebanks,normall
y,al
soassesst
he
requi
rementonthebasisofholdi
ngnormsal
soand
sancti
ontheli
mitwhi
chev eri
shigher
.
*Suggest
edbyNay
akCommi
tt
ee.
*Appl
icabl
eifWor
kingCapi
tall
imi
tneededi
supt
o
5Cr
.
*
Thismethodassumeswor
kingcapi
talcy
cleof3
months.
*Itassumesthatt
her
ewi
llbet
otal4wor
king
capit
alcycl
einayear
.
Joi
nCAI
IBWI
THASHOKonYouTube
*Iftot
alworki
ngcapit
alneedin100%ofannual
tur
nov eri
nay eart
henforoneworki
ngcapit
al
cycl
eitneedonly25%ofannualtur
nover
.(
Total4
cycl
e)
CALCULATI
ON :

Workingcapi
talr
equi
rement=25%ofpr
oject
annualsal
e.
BankLi
mit =20%ofpr
ojectannualsal
e(APS)
Bor
rower
smar
gin=5%pr
oject
edAnnualsal
e(APS)

*Ifmargi
nav ai
lablewit
htheborroweri
smor et
hen
25%ofpr oject
edannualsalethenli
mitwi
llbe
reducedaccordingly
.

Exampl
e1:
1.Pr
ojectannualsal
e=8cr
ore
2.Networki
ngcapi
tal=52l
akh,Nowcalcul
ate
Worki
ngcapi
tall
imi
taspert
urnovermet
hod.
Joi
nCAI
IBWI
THASHOKonYouTube
Sol
uti
on:
*
Wor
kingcapi
talr
equi
rement=25%APS
=25*8Cr
=2Cr
*
Bankl
imi
t=20%APS=20*8Cr
=160Lac
*
Bor
rower
smar
gin=5% APS=5%*
8Cr
=40Lac

*Mar
ginAv
ail
abl
eint
hef
orm ofNWC=52l
acso
Fi
nalBankLi
mit
=WCR-NWC
=200l
ac-
52Lac=148Lac

Exampl
e2:
1.Pr
ojectannualsal
e=4cr
ore
2.
A-Networ
kingcapi
tal=20l
ac
B-Networ
kingcapi
tal=32Lac
Nowcal
cul
ateWCbankl
imi
taspertur
nov
er
met
hodorAsperNay
akcommit
tee.
Joi
nCAI
IBWI
THASHOKonYouTube
Sol
uti
on:
*
Wor
kingcapi
talr
equi
rement=25%APS
=25*4Cr
=1Cr
=100Lac
*
Bankl
imi
t=20%APS=20*4Cr
=80Lac
*
Bor
rower
smar
gin=5% APS=5%*
4Cr
=20Lac
A-BankLi
mit=80Lac
B-Mar
ginAv
ail
abl
eint
hef
orm ofNWC=32l
acso
Fi
nalBankLi
mit
=WCR-NWC
=100l
ac-
32Lac=68Lac

3.CASHBUDGETMETHOD:

Anyeconomi cacti
v i
ty,
howeversmal
litmaybe,
i
nv ol
vesoutfl
ows( expendi
tur
e)ofmoneyfor
procurementofinputsandinf
lowsofmoney
(i
ncome)f r
om thesaleofoutput.
Joi
nCAI
IBWI
THASHOKonYouTube
Thenature,
amountandper iodi
cit
yofout fl
owsand
i
nflowsispecul
iart
othetypeofact iv
ity
,levelof
operati
ons,
marketcondit
ionsandt hepolici
es
adoptedbytheowners/managers,etc.
Thegenesisofanent er
pri
se'sr
equir
ementf orthe
wor ki
ngcapit
alf
unds, f
rom t
hebank,liesinthefact
thatduri
ngaparti
cularday,i
tsopeni
ngcash
balanceandcashinfl
owsar enotsuf
ficientt
omeet
i
tsnor malcashoutf
lows.
Shortt
erm bankfi
nance,cal
ledworki
ngcapital
fi
nance,f
ulfi
lst
hisrequi
rementofexcesscash
outf
lows.
Theref
ore,anidealwayt oassesstheneedf orbank
fi
nanceistopr eci
sel
yprojectthecashinfl
owsand
outf
lowsforeachdayandpr ovidef
inancetomeet
thecashdef i
cit
.But,pr
oject
ionofdailycashflows
i
snotaf easibleopti
onbecausemar ketconditions
arenotperfect.
Ther
efore,t
heper
iodi
cit
yofesti
matingcashf
lows
i
sincreasedtoamorefeasi
blel
evelofamonthora
quar
ter.
Joi
nCAI
IBWI
THASHOKonYouTube
Astatementofestimatedcashinflowsand
outf
lowsispreparedforthi
speriodandbank
fi
nanceequaltothecashdef i
cit
,ifany,
is
sancti
oned.

1.Borr
ower '
sworki
ngcapitalrequi
rementsar
e
capi
talrequir
ement
sarecal cul
ateonthebasi
sof
monthlycashbudgetsandf i
nanceisprov
ided
wherevertherei
sshort
fal
l
2.Li
mitcal
cul
atedont
hebasi
sofpeekdef
ici
t
3.Met
hodisusedwhi
lef
inanci
ngseasonal
I
ndust
ri
es
1.
Jut
e/sugarmi
ll
s/Tea/Cof
feeI
ndust
ry
2.
Const
ruct
ionAct
ivi
ty
3.
IT&sof
twar
eIndust
ri
es
4.
Fil
m maki
ng
Joi
nCAI
IBWI
THASHOKonYouTube

Exampl
e1:

Cal
culat
eWor
kingcapi
tall
imi
taspercashbudget
method.

I
tem Jan Feb Mar Apr
Openi
ngCash 80 60 60 60
CashRecei
pt 100 20 140 40
CashPay
ment 120 100 200 150
Cl
osi
ngbal
ance 60 60 60 60
Joi
nCAI
IBWI
THASHOKonYouTube
Sol
uti
on:

I
tem Jan Feb Mar Apr
Openi
ngCash 80 60 60 60
CashRecei
pt+ 100 20 140 40
CashPay
ment
- 120 100 200 150
Cl
osi
ngbal
ance- 60 60 60 60
Sur
plus/
Def
ici
t 0 -
80 -
60 -
110

Wor
kingcapi
tall
imi
t=
Peakdef
ici
t(Apr
ilmont
h)=110Lac
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er29:
TERM LOAN
Whatwewi
llst
udy?
*
Whati
sTERM LOAN?
*
Whati
sDef
err
edPay
mentGuar
ant
ee?
*
HowPr
ojectAppr
aisali
sdone?

I
MPORTANTPOI
NTSABOUTTERM LOANS:
1.Banksprovideter
ml oansnormall
yforacqui
ri
ng
the f
ixed assetslike land,bui
ldi
ng,plantand
machiner
y,i
nfrast
ructur
eet c.
,
(
personalloans,consumpti
on l
oans,educat
ional
l
oans,etc.
,bei
ngexcepti
ons)
whil
et heworki
ng capi
tall
oansar eprovi
ded for
sust
ainingt
heworkingcapi
tal
,i.
e.,cur
rentassets
l
evel.
Joi
nCAI
IBWI
THASHOKonYouTube

2.Inexcepti
onalcases,bankspr
ov i
det er
mloans
forcurrentassets al
so.Thisis call
ed Worki
ng
Capit
alTerm Loan(WCTL).
As we ar e awar e,t he busi ness enterpri
se i s
supposedt obr i
ngapar tofitsfundsr equiredt o
maintai
nthedesi redl evelofcurrentassetsfrom its
l
ongt erm sources( capitalortermliabi
li
ti
es),called
NWC( networ king capi tal=CA-CL),so t hatt he
sti
pul
atedcur r
entr atio(
CA/ CL)canbemai ntained.
Ift
heenter
pri
sei snotabl
etobringint
her equi
red
amountofNWC,i twillf
eelli
quidi
tycrunch and
busi
nessoperat
ionswil
lbeaf
fect
ed.Insuchcases,
banksmayprovi
deWCTL.
3.Wor ki
ngcapitalloansarenor
mall
ysanct
ioned
foroneyearbutarepayabl
eondemand.
Term loans are pay abl
e as per the agreed
repay
mentschedul e,which i
s st
ipul
ated i
nt he
termsofthesanct
ion.
Ther
efore,f
orthepurposeofmatchi
ngasset
sand
l
iabi
li
ti
esoft hebank,termloansareconsi
der
ed
Joi
nCAI
IBWI
THASHOKonYouTube

l
ongt er
m assetswhil
ewor ki
ngcapi
tall
oansar
e
consi
deredasshor
tter
m asset
s.
Practi
call
y,however,an enter
pri
se conti
nues t
o
enjoyt heworki
ng capi
talloan t
il
lit
swor ki
ng i
s
satisf
actor
y,whi
lethetermloangetsrepai
dovera
periodofti
me.
4.Asat ermloani sexpect edt oberepaidoutoft he
fut
urecashf lowsoft hebor rower,theDSCR( Debt
Servi
ceCov erageRat i
o)assumesgr eatimportance
while consi
dering t er
m l oans,whi l
ef orwor king
capit
alloans,thel i
quidit
yr at
ios(qui
ckr ati
o,current
rat
io)assumegr eaterimpor t
ance.
5.Thereisnouniformrepaymentschedulef
orall
termloans.Eachterml oanhasitsownpecul i
ar
repay
ment schedule dependi
ng upon the cash
surpl
usofthebor
rower.
Thus,incaseofasal ari
edperson,whereincome
l
ev eli
sconstant
,therepaymentcanbethroughEMI
system andincaseofaf ar
mer,therepaymentof
pri
ncipal and inter
est may coinci
de wi t
h the
Joi
nCAI
IBWI
THASHOKonYouTube

cr
oppi
ngpat
ter
n.
Incaseofindustri
alenterpr
ises,nor
mall
y,banks
sti
pul
atemonthly
/quart
erlyrepaymentofpri
nci
pal
al
ongwithal
ltheaccumulatedinter
est
.
In some cases,the ent
ir
er epaymentmay be
sti
pulat
edinoneinst
almentonly,cal
ledt
hebul
let
repayment
.

DEFERREDPAYMENTGUARANTEES(
DPGs)
:
Whent hepurchaserofafixedasset
sdoesnotpay
tothesuppli
erimmedi at
ely,butpay
saccordi
ngt o
an agreed repayment schedule,and the bank
guarant
eesthisrepayment,theguar
anteeiscal
led
DPG.
Thi
sis a Non-f
und based met
hod f
orf
inanci
ng
pur
chaseoff
ixedasset
s.
However
,ifthepurchaserdef
aul
tsinpaymentof
anyamount,thebankhastopayt hesametothe
suppl
i
erandtheexposurebecomesfundbasedti
ll
Joi
nCAI
IBWI
THASHOKonYouTube

t
heamounti
srecov
eredf
rom t
hecl
ient
.
Theri
sksinv
olvedinaDPGar esameast hosei
na
ter
mloanandt her
efore,t
heappr
aisalf
oraDPGi s
sameasthatforater
ml oan.
DI
FFERENCE BETWEEN TERM LOAN APPRAI
SAL
ANDPROJECTAPPRAISAL:
Thedi
ff
erencescanbesummar
izedasunder
:
(a)Inproj
ectfi
nanceal
lthefi
nancialneedsofthe
enter
pri
se,incl
udi
ngworkingcapi
talrequi
rements,
areappr
aised.
Thisisbecauset
het ot
alr
equi
rementofl
ongt erm
fundsincl
udesmargi
nmoneyforworki
ngcapi
tal.
Afterassessi
ngthetotalr
equi
rementoflongter
m
funds,thebanksdecideupontheamountoft er
m
l
oant obesanct i
onedandt hecontr
ibut
ionofthe
promoters.
(
b)Ifanexisti
ngenterpr
isewant
stopurchasea
f
ew machiner
ies,whi
char enotgoi
ng t
o havea
maj
orimpactont hevol
umeorcomposi
ti
onoft he
Joi
nCAI
IBWI
THASHOKonYouTube

business,itwillservelit
tl
e pur
pose t
o havea
detail
edexaminati
onoftechno-
economi
cfeasi
bil
it
y,
manager i
alcompetence,
IRR,et
c.
I
tmaybe enough f orthe bank t
o examine t
he
pr
oject
ionsfornext2-3y
earstofindoutthatDSCR
i
satsatisf
actor
ylevel
.

Incaseofl oanstoindi
vidual
salso,l
ikehousing
l
oans,educati
onall
oans,etc.
,itmaybeenought o
examinet
hepr oj
ect
edDSCRt ojudget
heviabi
li
ty.
Howev er
,t he basic pr
inci
ples ofappr aisalofa
proj
ectorast andalonet er
ml oanar enotdi ff
erent
and ifone is clearaboutpr ojectappr aisal
,t he
apprai
salofa st andalonet erm loan proposali s
evensimpler.
Joi
nCAI
IBWI
THASHOKonYouTube

PROJECT APPRAI
SAL:Projectapprai
salcan be
br
oadlyt
akeni
nthefol
lowi
ngsteps:
(
a)Appr
aisalofManager
ialAspect
s
(
b)Techni
calAppr
aisal
(
c)Economi
cAppr
aisal

(
a)Appr
aisalofManager
ialAspect
s:
The apprai
salof manager
ialaspectsi nv
olv
es
seeki
ngt
heanswert
othefoll
owingquest
ions:
(
i)Whatar
ethecr
edent
ial
soft
hepr
omot
ers?
(i
i)Whatist hefi
nancialst
akeofpr omotersint he
proj
ect?Cant heybringaddi
ti
onalfundsincaseof
conti
ngencies ari
sing out of delay in project
i
mplement ati
onandchangesinmar ketcondit
ions?
(i
ii
)Whati stheform ofbusi
nessorgani
sati
ons?
Whoar ethekeyper
sonstobeappoi
ntedtorunthe
business?
Joi
nCAI
IBWI
THASHOKonYouTube

(
b)Techni
calAppr
aisal
:
Thet echni
calfeasibi
li
tyofapr
ojecti
nvol
vest
he
fol
lowingaspects:
(
i)l
ocat
ion
(i
i) product
s t
o be manuf
act
ured, pr
oduct
ion
process
(
ii
i)av
ail
abi
li
tyofi
nfr
ast
ruct
ure
(i
v)provi
deroft
echnol
ogy det
ail
s ofpr
oposed
const
ruct
ion
(
vi)cont
ract
orf
orpr
ojectexecut
ion
(
vii
)wast
edi
sposal
andpol
lut
ioncont
rol
(
vii
i)av
ail
abi
li
tyofr
awmat
eri
als
(
ix)mar
ket
ingar
rangement
s
(c)Economic Appr
aisal
:The economic/
financial
feasi
bil
it
y of a pr
oject i
nvol
ves the f
ol l
owing
aspects.
(i
)Retur
nonInvestment:Theusualmethodsused
aret
heNPV(netpresentval
ue),I
RR(i
nter
nalr
ateof
Joi
nCAI
IBWI
THASHOKonYouTube

ret
urn) , payback peri
od, cost benef
itr
ati
o,
account
ingrat
eofretur
n,etc.
(i
i)Br
eak-evenAnal
ysis:Aproj
ectwi t
hahighbreak-
evenpointisconsideredmorer iskycomparedto
theonewi t
hlowerbreak-
evenpoint.
(i
ii
)Sensiti
vi
tyAnalysi
s:Asmar ketcondit
ionsare
uncert
ain,a smallchange inthe pri
ces ofr aw
material
s orfi
nished goods mayhav e a dr
asti
c
i
mpacton t he vi
abil
it
y ofa project
.Sensiti
vit
y
analy
sisexaminessuchimpact.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er29:
TERM LOAN(
PART-
II
)
Whatwewi
llst
udy?
*Whati
sAppr
aisalandf
inanci
ngofI
nfr
ast
ruct
ure
Proj
ect
?

APPRAI
SAL AND FI
NANCI
NG OF
I
NFRASTRUCTUREPROJECTS
The sect ors i ncluded in the definit
ion of
“I
nfr
astructure”areaspertheGazett
eNot if
icat
ions
i
ssuedbyt heMi nistryofFi
nance,Gov
er nmentof
I
ndia,f
rom t i
met otime.
Present
ly,the fol
lowing i
nfrastr
uct
ure sect
ors
quali
fyunder‘
i
nfr
astruct
urel
ending'
:
Joi
nCAI
IBWI
THASHOKonYouTube

(a)Transpor
t:Thi
sincl
udes Roads and br
idges,
Port
s,Inl
andWater
ways,
Air
port,
Rail
wayTrack
(b)Ener gy
:Thi si ncludes Elect
rici
ty Generat
ion,
Elect
rici
tyTransmission,Elect
rici
tyDistr
ibut
ion,Oil
pipel
ines,
Liquef
iedNat uralGas(LNG) .
(
c)Wat er&Sanit
ati
on:Thisincl
udesSol i
dWaste
Management, Water supply pipel
ines, Wat
er
t
reat
mentplant
s,Sewagecoll
ecti
on.
(d)
Communi cati
on;This i
ncl
udes
Telecommunicati
on, Tel
ecommuni
cati
on
towers,
Tel
ecom Services.
(e) Soci
aland Commer cialInf
rastr
uctur
e;Thi s
i
ncludes Educat i
on Inst
ituti
ons (capit
al stock),
Hospital
s( capi
talst
ock),,SEZ,t ouri
sm facili
ti
es
and agr icult
ure mar kets, Ferti
li
zer ( Capital
i
nvestment )
.
Joi
nCAI
IBWI
THASHOKonYouTube

RBI guidel
ines to the banks for f
inanci
ng
i
nfr
astr
uctur
epr oj
ect
s,ar
easfol
lows:
(
a)Ty
pesofFi
nanci
ngbyBanks:
I
n or der t o meet f i
nancial requir
ements of
i
nfrastr
ucture projects,banks mayext end cr
edit
faci
li
tybywayofwor kingcapitalf
inance,t
ermloan,
proj
ect l oan, subscr ipt
ion t o bonds and
debentures/
preferenceshar es/equit
yshares.
(i
)Take- outFinanci
ng:Banksmayenterint
ot ake-
out f inanci
ng ar rangement wi
t h IDFC/other
fi
nancialinsti
tuti
ons oravailofl
iqui
dit
ysuppor t
fr
om IDFC/ ot
herFls.
(i
i) I nter-
instituti
onal Guarant ees: Banks ar e
permi t
ted t oi ssue guarant
ees f avouring other
l
endi ng institutions inrespectofi nfrastr
ucture
projects,prov idedt hebankissui ngt heguar antee
takesaf undedshar einthepr ojectatl easttot he
extentof5 percentoft he pr ojectcostand
under t
akesnor malcr edi
tappraisal,moni tor
ingand
foll
ow- upoft hepr oject
.
Joi
nCAI
IBWI
THASHOKonYouTube

(
ii
i)Fi
nanci
ngPr
omot
er'
sEqui
ty:
banks wer e adv i
sed t hat t he promot er'
s
contr
ibut
ion towar
ds t he equity capit
al of a
companyshoul dcomef r
om theirownr esources
andthebankshouldnotnormall
ygr antadvancesto
takeupsharesofothercompanies.
In v i
ew of t he i mportance attached to t he
i
nfrast
ructuresector,RBIhaspermi t
tedthat,under
cert
aincir
cumst ances,anexcept i
onmaybemade
tothispolicyforf i
nancingt heacquisi
ti
onoft he
promoter'
ssharesi nanexi st
ingcompany ,whichis
engaged i n i mplement i
ng or oper ati
ng an
i
nfrast
ructureproj
ectinIndia.

(
b)Appr
aisal
:
(i
)Inrespectoffinanci
ngofinfr
astruct
ureproj
ects
under
takenbyGov ernmentownedent i
ti
es,banks/
Fi
nancial Insti
tuti
ons should under take due
di
li
genceont heviabil
it
yofthepr
ojects.
Joi
nCAI
IBWI
THASHOKonYouTube

Banks should ensur e t hat the indi


vidual
component
soffinanci
ngandr et
urnsont
heproject
arewel
ldef
inedandassessed.
(
ii
)I nf
rast
ruct
ure pr
oject
s are of
ten f
inanced
t
hroughSpeci
alPur
poseVehicl
es.

Financi
ngoft heseprojectswoul
d,ther
efor
e,call
forspecialappr
aisalskil
lsonthepartoflendi
ng
agencies.
(
c)Pr
udent
ialRequi
rement
s:
(
i)Pr
udent
ialCr
edi
tExposur
eLi
mit
s:
Credi
texposur etoborr
owersbelongi
ngt oagroup
mayexceedt heexposurenorm of40percentof
thebank'scapi t
alfundsbyanaddi t
ional10per
cent(i
.e.
,upt o50percent),
prov
idedtheadditi
onal
credi
texposureisonaccountofextensionofcr
edit
toinf
rast
ructureproj
ects.
Credi
texposur
etosingl
eborr
owermayexceedt
he
exposur
enorm of15percentoft
hebank'
scapi
tal
Joi
nCAI
IBWI
THASHOKonYouTube

fundsbyanaddi t
ional5percent(
i.
e.,upt
o20per
cent)prov
idedtheadditi
onalcr
edi
texposur
eison
accountofinf
rast
ructur
e.
(i
i)Assi
gnmentofRi
skWei
ghtf
orCapi
talAdequacy
Purposes:
Banksar erequi
redt
obegui dedbythePrudenti
al
Guidel
ines on Capital Adequacy and Market
Disci
pli
ne-I
mplement
ation of the New Capi t
al
AdequacyFramework.
(
ii
i)Asset
-Li
abi
li
tyManagement
:
Thel ong-ter
mf inanci
ngofinfr
astructur
eproject
s
may l ead t o asset – liabi
lit
y mi smatches,
part
icularl
y when such f i
nancing i s not in
conformi t
ywi ththe mat
uri
typr ofi
le ofa bank'
s
l
iabi
lit
ies.
Bankswoul d,therefore,needtoexerci
seduevigi
l
ontheirasset-l
iabil
it
yposi ti
ontoensuret
hatthey
donotr unintoliqui
ditymi smat
chesonaccountof
l
endingtosuchpr oj
ects.
Joi
nCAI
IBWI
THASHOKonYouTube

(
iv)Admi
nist
rat
ivear
rangement
s:
Timelyandadequateavai
labi
li
tyofcr
editi
sthepr
e-
requi
sit
e f or successful implementat
ion of
i
nfrastr
uct
ureproj
ects.
Banks/FIsshoul
d,therefor
e,clearl
ydelineat
et he
procedurefor approvalof loan proposals and
i
nstit
ute a suit
able monitor
ing mechani sm for
revi
ewing applicat
ions pendi ng bey ond t he
specif
iedper
iod.

(
d)Take-
outFi
nanci
ng/
Liqui
dit
ySuppor
t:
(
i)Take-
outFi
nanci
ngAr
rangement
:
Take-out f
inanci
ng st r
ucture is essential
ly a
mechanism designed to enable banks to avoid
asset
-li
abi
li
tymat ur
it
ymi smatchest hatmayar ise
outofextendinglongtenorloanstoi nf
rast
ructure
proj
ects.
Joi
nCAI
IBWI
THASHOKonYouTube

Under t he ar rangement s,banks f inancing t he


i
nfrastructur
e pr ojects wi l
lhav e an ar rangement
withI DFC orany ot herf inanciali nstitut
ion f or
tr
ansfer r
ingt ot hel attert heout standi ngi nt heir
bookson a pr e-determined basi s.I DFC and SBI
havedev i
seddifferentt ake-outfinancingst r
uctures
to sui tt he r equirement s of v ar i
ous banks,
addressingi ssuessuchasl i
quidit
y ,asset -l
iabil
ity
mismat ches, l
imi t
edav ai
labil
it
yofpr oj ectappr aisal
ski
lls,
et c.
(i
i)Liquidi
tySuppor tf rom IDFC:Asanal t
ernati
veto
take-outf i
nancing st ructure,I DFC and SBIhav e
devised a product ,pr oviding liquidi
tysuppor tto
banks.Undert hescheme,I DFCwoul dcommi t
,at
the poi nt of sanct ion,t or efinance the entir
e
outstandingloan( principal+unr ecover
edi nt
erest)
orpar toft hel oan,t othebankaf teranagr eed
period,say,fi
vey ears.
Joi
nCAI
IBWI
THASHOKonYouTube

(e)Par
ti
alCr
edi
tEnhancement(
PCE)t
oCor
por
ate
Bonds:
The credi
tneeds oft he inf
rast
ruct
ure sectorin
I
ndia are huge.As t he Indi
an corporat
e bond
marketisatanascentst ageofdevel
opment ,ther
e
i
sexcessivepr essureon thebanking system to
fund t
he credi
tneeds f orproj
ectdev el
opment ,
i
ncludi
ngtheinfrast
ruct
uresector
.
Due t o gr eater asset-
li
abil
it
y mismatch in
i
nfrast
ruct
ure and project fi
nanci
ng,banks ar
e
exposedtoli
quidit
yri
sk.
Thei nsuranceandpr ovi
dent/pensionfunds,
whose
l
iabili
ti
esar el ongt erm,maybebet tersuit
edt o
fi
nancesuchpr oject
s.Wi thav i
ew toencouraging
corporates to av ailofbond f inancing,RBIhas
decidedt oal l
ow bankst oprovi
dePCEt obonds
i
ssued by cor porates/speci
al purpose vehicl
es
(SPVs)f orfundingal lty
pesofpr oject
s,subjectto
certainguidel
ines.
Joi
nCAI
IBWI
THASHOKonYouTube

Tobegi nwith,banksareallowedtoof ferPCEonl y


i
nt heform ofanon- fundedirr
evocablecontingent
l
ineofcr edit
.Theobj ect
ivebehindallowingbanks
toextendPCEi stoenhancet hecreditrati
ngoft he
bondsissuedsoast oenablecorporatestoaccess
thefundsfrom thebondmar ketonbetterterms.
(
f)Financi
ngofCostOv
err
unsf
orPr
oject
sunder
I
mplementati
on
1.Int
ernat
ional
ly,
proj
ectf
inancel
enderssancti
ona
'
standbycr edi
tfacil
it
y't
of und costoverr
uns i
f
needed.
Such'
standbycredi
tfacil
it
ies'
aresancti
onedatt
he
ti
meofi ni
ti
alfi
nancialcl
osure;butdisbur
sedonl
y
whentherei
sacostov err
un.
At t he t i
me of cr edi
t assessment of
borrower
s/proj
ect,such costoverruns ar
e also
takenintoaccountwhiledetermi
ningt heproj
ect
DebtEqui t
yRat i
o,DebtSer vi
ce Cover
age Ratio,
FixedAssetCover
ageRatioetc.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er30:
CREDI
TDELI
VERY
Whatwewi
llst
udy?
*
Whati
sCr
edi
tDel
i
ver
y?
*
Whati
sDocument
ati
on?
*
Whati
sThi
rdPar
tyguar
ant
ee?

I
NTRODUCTI
ON:
While,f
orthesafetyofanadv ance, thecredi
t
apprai
saliscri
ti
calforsel ect
ingt her i
ghtborrower,
assessinghiscr
editneedsandt hev i
abil
it
yofhi s
operati
onsappropriatelyandpr escribi
ngsuitable
ter
msandcondi tionsf orthecredi t
,thereareaf ew
questi
onst obeaddr essedbef orethebankpar t
s
withit
smoney .
Joi
nCAI
IBWI
THASHOKonYouTube

Thesequest
ionsar
e:
(a)Whatdocument sshouldbeobtainedfrom t
he
borrowerandtheguarantorsothatintheeventof
anydefault
,thebankhast hel
egalrecourseto
recovert
hemoney ?
(b)Whet
heranychargeistobecreatedont
he
pri
maryandcol
lat
eralsecuri
ty?I
fyes,howi
tshoul
d
bedone?
(
c)Whet
herthechargeoft
hebankont hesecur
it
ies
i
stor
egi
ster
edwi t
hanyauthor
it
yprescri
bedbythe
l
aw?
(d)Whetherthesecuri
ti
esshoul
dbei
npossessi
on
oftheborrowerorthebank?
(e)Howt heloanshouldbedi sbursed?Whetherwe
i
ssueachequef ortheloanamounti nthenameof
theborroweror,shouldhisaccountwi t
hthebank
becreditedorshouldsomeot hermethodbe
adopted?
(
f)Whatar
etheRBIgui
del
inesi
nthi
srespect
?
Joi
nCAI
IBWI
THASHOKonYouTube

DOCUMENTATI
ON:
Documentsar
etobesi gnedbyt
hebor
rowersand
guar
antor
ssothatthebankcanest
abl
isht
heir
l
iabi
li
tyi
nacourtoflaw.
I
naddit
ion,t
hebor r
owerhastosi
gnthedocuments
whi
chcreatechargeovert
hepri
marysecuri
ty,
i.
e.
t
hesecuri
tycreat
edoutofthebankfi
nance.
Forchargeovercol
lat
eralsecur
it
y,theownerof
thatsecur
it
yshouldsi
gnt herel
evantdocument
s.
Itshoul
dbeensur edthatiftheownerofthe
coll
ater
alsecur
ityissomeoneot hert
hant he
borrower,
heshoul df
irstbecomeaguar antoroft
he
l
oanandt hencreatechargeov ert
hesecurity
.
Fewpoints,whichmustbeensur
ed,byt
hecr
edi
t
off
icer
,inconnecti
onwit
hexecuti
onoft
he
documents,areasunder
:
(
a)Thedocument
sshoul
dbepr
oper
lyst
amped
(b)Thedateofexecut
ionofdocument
sshould
neverbeearl
iert
hanthedateofst
amping.Dat
eand
Joi
nCAI
IBWI
THASHOKonYouTube

placeofexecut
ionshoul
dbepr
oper
lyment
ionedi
n
thedocuments.
(
c)I
tshoul
dbeensuredthatt
hepar t
iesexecut
ing
t
hedocumentshavet
henecessaryauthori
tyand
t
hecapaci
tyt
oenteri
ntoacontractandexecuted
t
hedocumentsi
nthatcapaci
ty.
Forexample,
apar
tnershouldsignonbehal
foft
he
fi
rm andnoti
nhi
sindi
vidualcapaci
ty.
(d)I
tshoul
dbeensur
edt
hatt
hepersonsigni
ngt
he
documentsi
sdoi
ngsowit
hhi
sfreewil
l.
(e)Thedocument
sshoul
dbef
il
ledi
nbef
oret
hese
aresigned.
(f)I
ncaseofcompanies,t
hechar
geshoul
dbe
regi
ster
edwithROC.withi
n30daysf
rom t
hedat
e
ofexecuti
onofthedocument
s.
(g)Ifanydocumentisrequi
redtober
egi
ster
edwi
th
theSub-regi
str
ar,
itshouldbedonewi
thi
nthe
prescri
bedti
mel i
mit.
Joi
nCAI
IBWI
THASHOKonYouTube

THI
RDPARTYGUARANTEES:
Whiletheenterprise/i
ndivi
dual,
whohast akenthe
l
oanf rom thebanki slegal
lyboundtorepaythe
pri
ncipalandthei nter
est,i
nsomecases, banks
sti
pulateguaranteesoft hi
rdparti
es,
asan
addit
ionalsafetyagainstdefaul
t.
Thesethi
rdpar
ti
escanbei
ndi
vi
dual
soranyot
her
l
egalenti
ty.
Incaseoff i
nancet ofi
rms, t
hepersonalguarant
ee
ofpropri
etor/part
nersisnotstipul
atedastheyhave
unli
mitedli
abili
tyandt hei
rpersonalasset
scanbe
att
achedforr ecoveryofbankloans.
Howev erincaseofcompani esandotherlegal
ent
iti
es,thepromoters/
director
s/tr
usteesdonot
haveunlimit
ed/anyli
abil
it
yt owardsbank'
sdues.
Therefor
e,inmanycasesbanksst
ipul
atet
hei
r
personalguar
ant
ees.
RBIsuggest
ionst
othebanksi
nthi
srespectar
eas
fol
lows:
Joi
nCAI
IBWI
THASHOKonYouTube

(i
)Per sonalguarant
eesofdi r
ector
smaybehel pful
i
nr espectofcompani es,whetherpri
vateorpubl
i
c,
wher esharesareheldcloselybyapersonor
connect edpersonsoragr oup(notbeing
professional
sorGov ernment).
Whereper sonalguaranteei sconsi
der ednecessary
,
theguaranteeshouldpr eferabl
ybet hatofthe
pri
nci
palmember soft hegr oupholdingshar esi
n
theborrowingcompanyr atherthanthatoft he
dir
ector/managerialpersonnelfuncti
oni ngas
dir
ectororinanymanager ialcapacit
y .
(i
i)Ev enifacompanyi snotclosel
yheld,
ther
emay
bej usti
ficat
ionf
oraper sonalguar
anteeof
di
r ectorstoensurecontinui
tyofmanagement.
Onewaybywhi chlendinginstit
utionscouldprotect
themselvesi
nsuchci r
cumst ancesi st
oobt ai
n
guarant
eesofthedirector
sandt husensureeither
theconti
nuit
yofthemanagementort hatthe
changesinmanagementt akepl acewiththeir
knowledge.
Joi
nCAI
IBWI
THASHOKonYouTube

(i
ii
)Personalguar
anteesofdirector
smaybehel pful
withregar
dtopublicli
mitedcompani esot
herthan
thosewhichmayber atedasfirstcl
ass,wher
et he
advanceisonanunsecur edbasis.
(i
v)Theremaybepubl icli
mitedcompani es,
whose
fi
nancialposi
ti
onand/orcapacityforcash
generati
onisnotsati
sfactor
yev enthoughthe
rel
evantadvancesaresecured.Insuchcases,
personalguar
anteesareuseful.
(v )Caseswher ether eisl
ikelytobeconsider
abl
e
delayi nthecreati
onofachar geonassets,
guar anteemaybet aken,wheredeemednecessary,
tocov ertheinteri
m periodbet weenthe
disbursementofl oanandt hecreat
ionofthe
chargeonasset s.
(v
i)Theguar anteeofparentcompaniesmaybe
obtai
nedi nthecaseofsubsidiari
eswhoseown
fi
nancialcondit
ionisnotconsideredsat
isf
act
ory
.
Joi
nCAI
IBWI
THASHOKonYouTube

CHARGEOVERSECURI
TIES:
Natur
eofsecur
it
yandtheoperat
ionalconveni
ence
oft
endeci
dethetypeofchar
getobecr eat
edovera
secur
it
y.
Thepr
ocedur
eforcr
eati
onofchargeissamef
or
bot
hpri
maryandcol
lat
eralsecur
it
ies.

Thepoi
nttobekepti
nmindist
hatonl
ytheowner
ofanassetcancr
eat
echar
geoveri
t.
Thechar
gecoul
dbeanyoft
hef
oll
owi
ng:
(
a)Mor
tgage(
House)
(
b)Hy
pot
hecat
ion(
Car
)
(
c)Pl
edge(
gol
d)
(
d)Li
en(
FD)
(
e)Assi
gnment
(LI
C)
Joi
nCAI
IBWI
THASHOKonYouTube

POSSESSI
ONOFSECURI
TY:
Att heti
meofappr
aisal
,bankerhastodeci
deabout
thepossessi
onofthesecuri
tyspeci
all
yincaseof
i
nv entor
y.
Withlegalsystem i
nthecount
rybei
ngsti
llnot
perfect
,thisaspecthasabear
ingontheoveral
lri
sk
rat
ingoft heproposal
.
Til
laboutadecadeago,afavouredmethodof
fi
nanceofmanybanksusedt obet he,‘
Lockand
Key’advancesi
nwhichthegoodsar ekeptina
godownandbankhol dsthekeysofthelocksoft
he
godown.
Ifanygoodsar etobedeli
v er
edtotheborrower ,
he
hastodepositthemoneyi nhiscashcreditaccount
(al
ternat
ivel
y,provi
deatrustrecei
pt)bef
orebank’ s
‘
GodownKeeper 'goest
ot hegodownanddel ivers
thegoods.
Thissystem wasv er
yinconveni
entnotonl
yf ort
he
borrowerbutforthebankalsoandslowlygot
changedt o‘
Hy pot
hecati
on',
wherepossession
Joi
nCAI
IBWI
THASHOKonYouTube

r
emai
nedwi
tht
hebor
rower
.
Incaseof“Pledge'
also,theborr
owercanhave
possessi
on,call
ed,“Constr
ucti
vePossessi
on'
,and
holdthegoodsasanagentoft hebank.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er30:
CREDI
TDELI
VERY(
PART-
II
)
Whatwewi
llst
udy?
*
Whati
sDi
sbur
salofl
oan?
*
Whati
sSy
ndi
cat
ionofl
oan?

DI
SBURSALOFLOANS:
Wor
kingCapi
talLoans:
Incaseofsol ebanki
ng,thebankprovi
dingworking
capi
talli
mitsopensacashcr edi
taccountofthe
borr
owerandal lhi
sfinanci
altr
ansact
ionsshould
beroutedthroughthi
saccount.
Withoutbank'
sper
missi
on,noaccountcanbe
openedwithanyot
herbank.
Joi
nCAI
IBWI
THASHOKonYouTube

Insuchcases,per
iodi
cstatement
softhataccount
areobtai
nedtokeepat abonthetr
ansact
ions.
Thedrawingsinthecashcreditaccountare
regul
atedthr
oughthesystem of‘Drawing
power”(DP)whichi
swithi
nt hesancti
onedcash
credi
tli
mit.
Ideall
y,t
heDPshouldbecalculat
edbyobt ai
ninga
statementofal
lthecurr
entassetsandliabi
li
ties
anddeductingf
rom itt
heNWCst i
pulat
edatt he
timeofassessmentoftheli
mit.
Howev
er,t
hisisnotf
easi
bleassuchastat
ementi s
nor
mall
yavail
abl
eonlyaf
teraccount
sar
efinal
ized.
Therefor
e, banksobtai
nthestat
ementofstocks,
book-debts/receiv
abl
esandthesundr
ycredit
ors
(accountpay able)
.
Thesethr
eei
temsfor
m majorpor
ti
onofcurrent
asset
sandli
abi
li
ti
esi
nmajorit
yoftheent
erpri
ses.
Suchstatementisnormall
yobtai
nedonmont
hly
basisbuttheperi
odici
tycanbereducedi
n
excepti
onalcases.
Joi
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Bysti
pulati
ngsuit
abl
emar gi
ns(dependi
ngon
methodofassessment)onstocksandbookdebt
s
andreducingtheamountofsundr
ycredi
tor
s,t
he
DPiscalculat
ed.
Ifwegivecashcreditt
obor r
ower,t
henthereisa
scopeofdiver
sionoffundsbyt hebor
rower.Ifthe
l
iqui
dityint
hemar keti
stightandshort
-ter
m
i
nterestonmoneymar ketinstr
umentsishigh,he
mayt endtout
il
izetheli
mi tf
ull
y.
I
nsit
uat
ionsofabundantl
iqui
dit
y,t
hesi
tuat
ioni
s
r
ever
seandtheuti
li
zati
onofli
mitmaytendtobe
l
ow.
Thebanklosesinsuchsituat
ionsasithasto
arr
angeforshor
ttermf undswheninterestr
ates
arehighandisl
eftwit
hsur pl
usfundswhenr ates
arelow.
Tomeett hi
ssit
uati
onandtoensurethatthe
uti
li
zati
onofli
mitismorest
able,
apor ti
onof
sancti
onedli
mitisdi
sbur
sedbywayof‘ Loan'
,
whichisafi
xedcomponent,andremainingamount
Joi
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i
sdi
sbur
sedascashcr
edi
t.
Withthi
s,i
ft hebor
rowerwant stodrawveryli
tt
le
amountornoamount ,ther
ewillbedebi
tintheloan
account(f
ixedamount )whil
ethecashcredit
accountmayhav ecreditbal
ance.
RBIgui
del
inesi
nthi
srespectar
easf
oll
ows:
(a)Int hecaseofbor rowersenjoyingwor king
capi t
alcreditl
imitsofRs.10cr oreandabov efr
om
thebanki ngsy st
em, theloancomponentshoul d
nor mallybe80per cent.Banks,howev er,havethe
freedom t ochanget hecomposi ti
onofwor ki
ng
capi t
albyi ncr
easingthecashcr editcomponent
bey ond20per centort oincr
easet he‘Loan
Componentbey ond80per cent
, asthecasemaybe,
i
ft heysodesi re.
(b)I
nt hecaseofborrower
senj oyi
ngwor king
capi
talcredi
tli
mitoflesst
hanRs.10cr ore,banks
mayper suadethem t
ogoinf orthe‘LoanSy stem'
byofferi
nganincenti
veintheform oflowerr ateof
i
nterestontheloancomponent ,ascompar edt othe
Joi
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cashcredi
tcomponent.Theact
ualper
cent
ageof
'
loancomponent'
inthesecasesmaybesett
ledby
thebankwithi
tsbor
rowercli
ents.
(c)Inrespectofcer t
ainbusinessactiv
iti
es,which
arecyclicalandseasonali nnat ur
eorhav einherent
volati
li
ty,thest ri
ctappli
cati
onofl oansystem may
createdifficult
iesfortheborrowers.Banksmay ,
withtheappr ovalofthei
rrespecti
v eBoards,
i
dent i
fysuchbusi nessacti
viti
es,whichmaybe
exempt edf rom theloansystem ofdeliver
y.

Ter
mloans:

Ift
het er
mloanist obedisbursedinonego,e.g.,
purchaseofamachi ne/
readyhouse, t
heborr
ower
i
saskedt odeposithismarginwiththebank,his
l
oanaccountisdebi t
edbyt heamountofthel oan
andtheenti
reamountt obepai dtothebuyer
, is
remitt
edtohim bythebank.
Joi
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I
fanyamounthasal readybeenpaidtothebuy erby
thecust
omer,satisfactorypr
oof,
li
kedetailsof
bankaccountetc.oft hi
spaymentisobtai
ned, and
thi
sisconsi
deredt obeapar tofhiscontr
ibuti
on
(margi
n).
Inexcept
ionalcases,l
ikeper
sonalloansor
consumptionloans,t
heamountmaybecr edi
tedt
o
theaccountofthecustomerwiththebank.
Incaseswheretheexecuti
onofthepr ojecti
s
spreadoveraperi
odoftime, t
hedisbursementis
normall
yrelat
edtotheprogressofthepr oj
ect.
RBIgui
del
inesi
nrespectofdi
sbur
sementofpr
oject
l
oansareasunder
:
“Atthet i
meoff i
nancingproj
ectsbanksgener
all
y
adoptoneoft hefol
lowingmethodologi
esasfaras
deter
mi ni
ngthelevelofpromoters'
equi
tyis
concerned.
1.Promoter
sbri
ngthei
rent
ir
econtr
ibut
ionupf
ront
beforet
hebankstar
tsdi
sbur
singi
tscommitment.
2.Pr
omot
ersbr
ingcer
tai
nper
cent
ageoft
hei
r
Joi
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equi
ty(40%–50%)upf
rontandbal
ancei
sbr
ought
i
nstages.
3.Promoter
sagree,abi
nit
io,
thatt
heywillbri
ngin
equi
tyfundspropor
ti
onat
elyasthebanksfinance
thedebtport
ion.
Whi l
eitisappreci
atedthatsuchdeci si
onsaretobe
takenbyt heboardsofther especti
vebanks,i
thas
beenobser vedthatthelastmet hodhasgreat
er
equityfundi
ngr i
sk.
Inor dert
ocont ainthi
srisk,banksareadvisedin
theirowninteresttohaveacl earpoli
cyregardi
ng
theDebtEqui t
yRat io(DER)andt oensurethatthe
i
nf usionofequity/f
undbypr omot er
sshouldbe
sucht hatthestipul
atedlevelofDERi smaintai
ned
atalltimes.
Joi
nCAI
IBWI
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LENDI
NGUNDERCONSORTI
UM/
MULTI
PLE
BANKI
NGARRANGEMENTS:
Thesolebankingi
ssuitabl
eforfi
nancingworki
ng
capit
alneedsofanenterpr
iseonl
yifthe
requi
rementiswit
hint
hepol i
cyfr
amewor kofthe
fi
nancingbank.
I
ft her equi
rementsgr owbey ondthecomf or
tlevel
oft hatbankduet oprudent i
alnor
msorr isk
percept i
onforapar ti
cul
arsegment /bor
rower ,
it
woul dl i
keanotherbankt ofi
nanceapartoft he
requirement softhatenterpri
se.
Sometimes,ev
enthebor
rower
smaypr ef
ernott
o
dependononebankandavai
lfaci
li
ti
esfr
om
var
iousbanks.
I
ftwoormor ebanksgetintoaf or
malarr
angement
t
of i
nancetheworkingcapit
alneedsofaborr
ower,
i
tiscall
edconsor
tium arr
angement .
Theconsor
ti
um banksdeci
deononeoft
he
membersas'Leadbank’
whonotonl
yarr
anges
per
iodi
cmeetingsoft
hememberbanksbutal
so
Joi
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takesleadi
nassessment
,document
ation,
char
ge
creat
ion,moni
tor
ingoft
heaccount
,etc.
Incaseofmul t
ipl
ebankingtherei
snof or
mal
arr
angementbet weenthebanksthoughtheymay
sharetheinf
ormationabouttheaccounti
nthei
r
mutualint
erest
.

SYNDI
CATI
ONOFLOANS:
Theter
m' Sy
ndicati
on'
isnor
mall
yusedforshar
ing
along-
ter
ml oantoaborr
owerbytwoormore
banks.
Thisisawayofshar i
ngtheri
sk,
associ
atedwi
th
l
endingtothatborr
ower,
bythebanksandis
general
lyusedforl
argel
oans.

Theborrower,int
endingtoavai
lthedesir
edamount
ofloan,gi
vesamandat etoonebank( cal
ledLead
bank)toarrangeforsancti
onsforthetot
alamount,
onitsbehalf.
Joi
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THASHOKonYouTube

Theleadbankappr
oachesv
ari
ousbankswi
tht
he
det
ails.
Thesebanksappr
aiset
heproposalaspert
heir
pol
ici
esandri
skappeti
teandtakethedeci
sion.
Theleadbankdoestheli
aisonworkandcommon
ter
msandconditi
onsofsanctionmaybeagreedin
ameet i
ngofpar
tici
pat
ingbanks,ar
rangedbythe
l
eadbank.
Normal
ly
,theleadbankchar
ges‘
Syndi
cat
ionf
ee'
fr
om t
heborrower.
Joi
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ABM MODULE-D
Chapt
er31:
CREDI
TCONTROL&MONI
TORI
NG
Whatwewi
llst
udy?
*
Whati
sCr
edi
tCont
rol&Moni
tor
ing?
*
Whati
sLRM (
LoanRev
iewMechani
sm)
?
*
Whatar
ethet
ool
sav
ail
abl
eforcr
edi
tmoni
tor
ing?

Cr
edi
tcont
rolandmoni
tor
ing
I
MPORTANCEANDPURPOSE:
Despit
eanexcellentcreditapprai
sal
,
documentati
onandobt enti
onofsecurit
y,t
heri
skof
defaul
tinanadvancemaygoupast heti
mepasses
becausetheassumpt ionsmadeatt hetimeof
apprai
salmayloset heirsanct
it
yi nv
iewofthe
dynamicnatur
eofbusi nessenvir
onment.
Joi
nCAI
IBWI
THASHOKonYouTube

Credi
tcontr
olandmonit
oring,
oftenref
err
edas
LoanReviewMechani
sm (LRM) ,
play
sanimport
ant
rol
einthefol
lowi
ngaspects:
(a)Toensuret
hatthefundspr
ovidedbyt
hebank
areputtothei
ntendeduseandconti
nuet
obeused
proper
ly.
Anydiver
sionofbank'
sfundsoutofthebusinessor
forunaut
hori
zedusewithi
nthebusinessshouldbe
detect
edandstopped.
(b)Toascer
taint
hatthebusi
nesscont
inuest
orun
ontheproj
ectedl
ines.
I
ft hereisanydeteri
orationfrom whatwas
projectedattheti
meofappr aisal
,thesameshoul d
benot icedandappropriateactionini
ti
atedbythe
bank, i
nconsultat
ionwi t
ht heborrower,toensur
e
thatthebusinesscontinuest orunonv i
ableli
nes.
(c)Ifthedeteri
orati
onoft hebusinesscont
inues
despi t
eappropri
ateact i
on, t
hebankshoulddeci
de
i
fanyhar shacti
onlike,recal
li
ngtheadvanceor
seizingthesecurit
y,etc.isnecessary
.
Joi
nCAI
IBWI
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AVAI
LABLETOOLSFORCREDI
T
MONI
TORI
NG/
LRM(
LoanRev
iewMechani
sm)

RBIhasadvisedthatthebanksshouldnotdepend
enti
rel
yonthecer t
ifi
cat
esissuedbyt heCharter
ed
Accountant
sorobt ai
nedfrom theborrowersabout
uti
li
sat
ionoffundsandmoni toringofcredi
t.
I
ncaseofi ncorrectcert
if
icati
on,i
nit
iat
ionof
pr
omptact ionasmaybewar r
anted,whichmay
i
ncludewithdrawal oft
hef aci
li
ti
essanctionedand
l
egalrecourseaswel l.
Thefol
lowingr
ecords/
inf
ormat
ion/
met hodsare
nor
mallyusedbythebanker
stomonit
orthecredit
:
(
a)Conductoft
heAccount
swi
tht
heBank:
Thisgi
v esver yusefuli
nformat i
onaboutthe
fi
nancialhealthoftheent er
priseanduseofthe
fundsbyit.Frequentov erdr
awi ngs,r
etur
nof
cheques/bil
ls,delaysinsubmi ssionofst
ock
stat
ement s,lowt ur
nover,etc.aresomeofthe
Joi
nCAI
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THASHOKonYouTube

unsat
isf
act
oryf
eat
ures.
Insuchcases, banksmayst rengt
hentheir
moni t
ori
ngsy stem byresorti
ngt omorefrequent
i
nspect i
onsofbor r
ower s’godowns,ensuringthat
saleproceedsar erout
edt hroughtheborrower '
s
accountsmaint ai
nedwi ththebankandi nsist
ingon
pledgeofthest ockinplaceofhy pot
hecation.

(b)Per
iodi
cInf
ormati
onSubmi
tt
edaspert
he
TermsoftheAdvance:
Thestatementsofstockandreceivablesaretobe
submitt
edbyt heborroweratr
egularinter
vals
(nor
mally,monthly
)andthebankcal culat
esthe
DrawingPower( DP)onthebasisofthese.
Athoroughscruti
nyoftheseisnecessarytov
eri
fy
t
heircorr
ectness,accumulat
ionofinvent
ory(
non-
movingstocks)andoldrecei
v abl
es.
Duri
ngperi
odicinspecti
onoftheenterprise,byt
he
bankof
fi
cial
s,thelatestst
ocks/
receiv
abl es
stat
ementarecrosscheckedwithther ecords.
Joi
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IBWI
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Stocksarealsophy
sical
lyv
eri
fi
edei
therf
ull
yoron
random sel
ecti
onbasis.

(
c)St
ock/
Recei
vabl
esAudi
tConduct
edbyt
heBank:
Stockauditisusedbyt hebanki
ncaseofmedi um
andlargesizeaccountswhereverif
yingthest
ocks
duri
ngnor malinspecti
onisnotfeasi
bleorwhere
thestocksarelocatedatvari
ouslocati
ons.
Simil
arl
y,auditofr
ecei
vabl
esmayal sobe
conductedinsomecases.Thepur poseofthese
audit
sistocrosschecktherel
iabil
it
yofthe
stat
ement ssubmitt
edbytheborrower.
(d)Fi
nanci
alSt
atement
soft
heBusi
ness,
Audi
tor
s'
Report
:
Thesear
enor
mal
lyav
ail
abl
eonceay
ear
.
Ananalysisofthesestat
ementsgivesuseful
i
nformationabouttheuse/di
ver
sionoffunds,
fi
nanci
alhealth,r
eali
sati
onofdebts,pr
ofi
tabi
li
ty,
Joi
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THASHOKonYouTube

et
c.
I
ncaseofworki
ngcapi
tall
imi
ts,
thi
sanal
ysi
sisa
par
toft
herenewal
exerci
se.

(
e)Per
iodi
cVi
sit
sandI
nspect
ions:
Thepur
poseofper
iodi
cvi
sit
sismani
fol
d.
(i
)itgivesanimpr essionaboutt
heacti
vi
tylevel
.
Theassessmentofl imit
sisbasedonan
anti
cipatedlevelofoperati
onsandfi
eldvi
sithel
ps
i
nascer tai
ningwhet heracti
vi
ti
esar
eatthatlevelor
not.
(i
i)i
thelpsi
nfi
ndingoutt
heposit
ionofst
ocksand
otherasset
schar
gedtothebank.
(i
ii
)Thefactofbank'
schargeovert
heassets
shouldbeprominent
lydi
splay
ed.Fi
eldv
isi
tshel
pin
fi
ndingoutthi
s.
(
f)I
nter
act
ionwi
thsel
ect
edcr
edi
tor
sanddebt
ors.
(g)Peri
odicscr
uti
nyofborrowers'booksof
accountsandtheaccount
smai ntainedwi
thot
her
Joi
nCAI
IBWI
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banks.
(h)MarketRepor
tsaboutt
heBor
rowerandt
he
BusinessSegment:
Theserepor
tsar
eavail
ablefr
om t
hei
ndust
ry
associ
ati
onsandrat
ingagenci
es.
(
i)Appoi
nti
ngBank'sNomi neeonCompany '
sBoard:
I
nexcepti
onalcases,ori
ncaseoflargeli
mit
s,bank
mayopttoappointnomineedir
ectorontheboar
d
t
okeepat abontheimportantdeci
sions.

(
j)Cr
edi
tAudi
t:(
nextl
ect
ure)

(
k)LegalAudi
tofti
tl
edocument
sinr
espectof
l
argeval
ueloanaccount
s:
RBIhadissuedacircul
aronJune30, 2011,
requi
ri
ngbankstoputinplaceasy stem wherein
theconcurr
entaudit
orswererequiredtolookinto
andreport
,int
eral
ia,onthegenuinenessofthet i
tl
e
documentsespecial
lyforl
argevalueloans.
Joi
nCAI
IBWI
THASHOKonYouTube

Onar ev
iew,RBIhasdeci dedthatt hebanksshould
alsosubjectthet i
tledeedsandot herdocumentsin
respectofallcreditexposuresofRs.5cr oreand
abovet operi
odicl egalauditandr e-ver
if
icat
ionof
ti
tledeedswi t
hr elevantauthorit
iesaspar tof
regularaudi
texer ciseti
lltheloanst andsful
ly
repaid.
Thebanksshouldfurnisharev
iewnot etoi
ts
Boar
d/AuditCommi t
t eeoft
heBoar datquar
terl
y
i
nter
val
sonanongoi ngbasi
sgivingther
einthe
i
nfor
mationinrespectofsuchlegalaudi
ts.
Joi
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ABM MODULE-D
Chapt
er31:
CREDI
TCONTROL&MONI
TORI
NG
(Par
t-
II
)
Whatwewi
llst
udy?
*
Whati
sCr
edi
tAudi
t?
*
Whati
sObj
ect
iveofCr
edi
tAudi
t?
*
Whati
sScopeofCr
edi
tAudi
t?

(
j)Cr
edi
tAudi
t:
Credi
tauditi
sanexami nat
ionofv
ari
ouscr
edi
t
funct
ionsofthebank.
Iti
snormal
lyconduct
edbyinter
nalst
affhav
ing
adequat
ecredi
texper
ience.
Joi
nCAI
IBWI
THASHOKonYouTube

Credi
tAuditexami
nescompli
ancewi thextant
sanct
ionandpost-
sancti
onprocesses/pr
ocedures
l
aiddownbyt hebankfr
om t
imet otime.
Eachbankfor
mul at
esitsownpoli
cies,
procedur
es,
andorgani
zat
ionalsetupforcr
edi
taudit.
RBIsuggest
ionsi
nthi
sr espect
,cont
ainedi
nthei
r
‘
Guidancenoteoncr
editriskmanagement,
areas
under:
(
i)Obj
ect
ivesofCr
edi
tAudi
t:
*
Impr
ovementi
nthequal
it
yofcr
edi
tpor
tfol
io
*
Reviewsanct
ionpr
ocessandcompl
iancest
atusof
l
argeloans
*
Feedbackonr
egul
ator
ycompl
iance
*
Pick-
upearl
ywarni
ngsi
gnal
sandsuggest
r
emedialmeasur
es
*Recommendcor r
ecti
veacti
ont
oimpr
ovecredi
t
quali
ty,
credi
tadmini
str
ati
onandcr
edi
tski
ll
sof
staf
f,et
c.
Joi
nCAI
IBWI
THASHOKonYouTube

(
ii
)St
ruct
ureofCr
edi
tAudi
tDepar
tment
:
Thecredi
taudit
/loanrevi
ewmechanism maybe
assi
gnedtoaspeci f
icDepar
tmentortheInspect
ion
andAuditDepart
ment .
(
ii
i)Funct
ionsofCr
edi
tAudi
tDepar
tment
:
*
Topr
ocessCr
edi
tAudi
tRepor
ts
*Toanal
yseCredi
tAuditf
indi
ngsandadv
iset
he
depar
tments/
functi
onari
esconcer
ned
*
Tof
oll
owupwi
thcont
rol
li
ngaut
hor
it
ies

*
Toprocesstheresponsesr
ecei
vedandarr
ange
f
orcl
osureoftherel
ati
veCredi
tAudi
tReport
s
*Tomaintai
ndat
abaseofadv
ancessubj
ect
edt
o
Credi
tAudit
Joi
nCAI
IBWI
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(
iv)ScopeandCov
erage:
Thefocusofcredi
tauditneedstobebroadened
fr
om theaccountl
evelt
ol ookattheov
erall
port
fol
ioandthecredi
tprocessbeingf
ollowed.
Thei
mpor
tantar
easar
e:
1.Por
tfol
ioRev
iew:
Examinethequali
tyofCredi
t&InvestmentPort
fol
io
andsuggestmeasuresforimprovement,i
ncl
uding
reducti
onofconcent
rati
onsincertai
nsector
sto
l
ev el
sindi
cat
edintheLoanPolicyandPrudenti
al
Limit
ssuggestedbyRBI.

2.LoanRev
iew:
*Revi
ewoft hesancti
onpr ocessandstat
usofpost
sancti
onprocesses/procedures(notj
ustrest
ri
cted
tolar
geaccounts)
*
Allfr
eshproposal
sandproposalsf
orr
enewalof
l
imit
s(wit
hin3–6mont hsfrom dat
eofsanct
ion)
Joi
nCAI
IBWI
THASHOKonYouTube

*Al
lexi
sti
ngaccountswithsanct
ionli
mit
sequal
to
oraboveacutoffdependi
ngupont hesi
zeof
act
ivi
ty
*
Randomlysel
ect
ed(say5–10%)pr
oposal
sfr
om
t
herestoft
hepor
tfol
io
3.Act
ionPoi
ntsf
orRev
iew:
Verif
ycompli
anceofbank'
slaiddownpol
ici
esand
regul
ator
ycompli
ancewithregar
dtosancti
on
Exami
neadequacyofdocument
ati
on
Conductt
hecr
edi
tri
skassessment
Exami
netheconductofaccountandf
oll
owup
l
ookedatbyl
inefunct
ionar
ies
Ov er
seeacti
ontakenbylinefunct
ionar
iesi
n
respectofser
iousir
regul
ari
ti
es
Det
ectear
lywarni
ngsi
gnal
sandsuggestr
emedi
al
measur
esther
eof
Joi
nCAI
IBWI
THASHOKonYouTube

4.Fr
equencyofRev
iew:
Thefr
equencyofr
evi
ewshoul
dvar
ydependi
ngon
themagni
tudeofr
isk

(say,f
orthehi
ghriskaccount
s–3mont hs,
forthe
averageri
skaccounts-6months,
fort
helowrisk
accounts1year)
.

(
v)Pr
ocedur
etobef
oll
owedf
orCr
edi
tAudi
t:
Cr
editAuditi
sconductedonsit
e,i
.e.
,atthebranch
whi
chhasappr ai
sedtheadvanceandwher et
he
mainoperati
vecr
editl
imit
saremadeav ail
abl
e.
Reportonconductofaccountsofall
ocatedli
mits
aretobecall
edfrom t
hecorrespondingbranches.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er32:
RISKMANAGEMENT&CREDI
TRATI
NG
Whatwewi
llst
udy?
*
Whati
sCr
edi
tRi
sk?
*
Whatar
etheFact
orsaf
fect
ingr
edi
tri
sk?
*
Whati
sCr
edi
tRat
ing?

MEANI
NGOFCREDI
TRI
SK:
Theri
sksf
acedbythebusi
nessofbankingcanbe
cl
assi
fi
edi
ntothr
eebroadcategor
ies;

(
a)Oper
ati
onalRi
sks:
Theexamplesofsuchrisksarelossesdueto
fr
auds,di
srupti
onofbusinessduet onat
ural
cal
amiti
eslikefl
oods,
etc.
Joi
nCAI
IBWI
THASHOKonYouTube
(
b)Mar
ketRi
sks:
Thesear
etheri
sksresul
ti
ngfr
om adver
semarket
movementsofi
nter
estrat
es,
exchangerat
e,et
c.
(
c)Cr
edi
tRi
sks:
Thecredi
tri
skcanbedefi
nedastheunwill
ingness
ori
nabil
it
yofacustomerorcount
erpar
tytomeet
hi
scommi tmentr
elat
ingt
oaf i
nanci
alt
ransacti
on
wit
hthebank.
Forexample,
inafundbasedli
mit
,thecredi
triski
s
thenonpaymentofpri
nci
palandi
nterestbythe
borr
ower,aspert
heagreedter
msofr epayment.
Incaseofanonfundbasedli
mit,t
hecreditri
sk
ari
sesasthecust
omermaynotr ei
mbur sethebank
ful
lyi
ncaseofinvocat
ionofaguarant
eeor
devol
vementofanLC.
Joi
nCAI
IBWI
THASHOKonYouTube
FACTORSAFFECTI
NGCREDI
TRI
SK:
(
a)Ext
ernalFact
ors:
Thesefact
orsaff
ectt
hebusinessofacust
omer
andreducehi
scapabil
it
ytohonourthet
ermsof
fi
nanci
altr
ansact
ionwit
hthebank.
Themai nexter
nalf actorsaffect
ingt
heov er
all
quali
tyofthecreditpor t
foli
oofabankar e,
exchangerateandi nterestratef
luct
uati
ons,
Governmentpolici
es, protecti
oni
stpoli
ciesofother
countri
es,
polit
icalrisks,etc.
Thesefact
orslooksimilartowhatisment ioned
undermarketri
sksabov e.But,
wher easthemar ket
ri
sksdi
rectl
yaffectabank, t
hefactorsment ioned
hereaf
fectthebusinessesofthecust omerst hus
i
mpairi
ngthequal i
tyofthecreditportf
oli
o.

(
b)I
nter
nalFact
ors:
Thesemai nl
yrel
atetooverexposure(concent r
ati
on)
ofcredi
ttoaparti
cularsegment/geographical
regi
on,excessi
velendi
ngt ocycl
icali
ndustries,
Joi
nCAI
IBWI
THASHOKonYouTube
i
gnoringpurposeofl oan,fault
yl oanandrepayment
str
ucturi
ng,defi
cienciesinthel oanpoli
cyofthe
bank,lowquali
tyofcr editappraisalandmonit
ori
ng,
andlackofanef f
icientrecoverymachi ner
y.

STEPSTAKENTOMI
TIGATECREDI
TRI
SKS:
Themaj orobj
ectiv
eofcr edi
triskmanagementist
o
l
imittheri
skwithinacceptablelev
elandthus
maximizetheriskadj
ustedr ateofret
urnonthe
cr
editportf
oli
o.
Fol
lowi
ngarethemai
nst
epst
akenbyanybanki
n
thi
sdir
ect
ion:
(
a)Atmacr
oLev
el:
Ther i
skst otheov erallcr edi
tportfol
ioofthebank
aremi t
igatedt hroughf requentrev i
ewsofnor ms
andf i
xinginternalli
mi tsf oraggregate
commi tment st ospecificsect or
soft he
i
ndust r
y /
businesssot hatt heexposur esareevenl
y
spreadov ervar i
oussect orsandt heli
kelyl
ossis
ret
ainedwi thintolerablel i
mits.
Joi
nCAI
IBWI
THASHOKonYouTube
Bankalsoper
iodi
call
yreviewstheloanpolici
es
rel
ati
ngtoexposurenormst osingl
eandgr oup
borr
owersasalsothestructur
eofdiscret
ionary
powersvest
edwi t
hvari
ousf uncti
onari
es.
Ear
li
er,RBIhadmadeitmandat
oryt
oclassi
fythe
por
tfol
iobyassi
gni
nghealt
hcodestoeachaccount
.
Thi
sisnotmandator
ynow.
Normally,
banksalsofor
mulatepol
ici
esrel
ati
ngto
rehabi
li
tat
ion,
compr omi
se,
recover
yandwr i
teof
fto
getthebestoutofaworstcasescenari
o.
(
b)AtMi
croLev
el:
Thisper t
ainstopol i
ciesoft hebankr egar ding
appraisalstandards,sanct i
oninganddel i
ver i
ng
process,moni tor
ingandr evi
ewofi ndividual
proposals/categori
esofpr oposals,obtent i
onof
coll
ateralsecurit
yetc.Cr editrat
ingsandcr edit
scori
ngpl ayimpor t
antr oleinthisarea.
Fordisper
sion/
transf
erofriski
nlar
gev al
ue
accounts,
bankcanr esortt
oconsort
ium/mult
ipl
e
banki
nganduseofder i
vati
vesl
ikecredi
tdef
ault
swaps.
Joi
nCAI
IBWI
THASHOKonYouTube
CREDI
TRATI
NGS:
Thelevelofcredi
tri
skinv
olv
edineachloan
proposaldependsontheuni
quefeat
uresofthat
proposal.
Twosimil
arproj
ect
s,wi
thdi
ff
erentpr
omot er
s,may
beapprai
sedbyabankashavi
ngdiff
erentcr
edi
t
ri
sks.
Simil
arl
y,Twodi ff
erentproj
ect
s,wi
thsame
promoters,mayalsobeappr ai
sedbythebankas
havi
ngdifferentcredi
tri
sks.
Whi
leapprai
singacreditproposal
,ther
iski
nvol
ved
i
salsomeasuredandof tenquanti
fi
edbywayofa
r
ati
ngwiththefol
lowingobjecti
ves:
(a)Todeci
deaboutaccept
ing,r
ejectingor
accept
ingwit
hmodifi
cati
ons/specialcovenant
s
(
b)Todet
ermi
net
hepr
ici
ng,
i.
e.,
ther
ateofi
nter
est
t
obechar
ged
(c)Tohel
pi nthemacroev al
uationoft
het ot
al
credi
tpor
tfoli
obyclassif
yingitontherat
ings
all
ott
edtoindivi
dualaccounts.
Joi
nCAI
IBWI
THASHOKonYouTube
Thisisusedforassessi
ngtheprovi
sioni
ng
requi
rements,asalsoadeci
sionmakingtool,
bythe
managementoft hebank,f
orrevi
ewingtheloan
poli
cyofthebank.

I
NTERNALANDEXTERNALRATI
NGS:
Mostoft hebank'sinIndiahavesetupthei
rown
credi
trati
ngmodel sast i
llr
ecentpast,t
herat
ing
agencieswerenotequi ppedwellenoughtoprov
ide
therat
ingssor el
iabl
east obanksdependingon
theseforcredi
tdecisi
ons.
However
,wit
hexperi
encegai
nedinl
astfewyear
s,
t
heserat
ingagenci
eshavegai
nedconf
idenceof
t
hebanks.
Afewofsuchr
ati
ngagenci
esar
eCARE,
ICRA,
CRISI
LandSMERA.
Joi
nCAI
IBWI
THASHOKonYouTube
METHODOLOGYOFCREDI
TRATI
NG:
Basedonit
sloanpol
ici
esandr
iskpercept
ions,
eachbankhasit
sownrati
ngmodel.
Commonf eaturei
nalltheriskmodelsisthata
scoreisgi
venfordi
ff
erentper cei
vedri
sksby
all
ott
ingdi
ffer
entweightages.
Thesum ofal
lthesescor
esf
ormsthebasi
sfor
deci
dingonri
skrati
ngofapr
oposal
.
Normal
ly,t
hebroadcat
egor
iesofr
iskar
easwhi
ch
ar
escored,ar
e:
(a)Pr
omoters/
Managementaspect
sandt
he
secur
it
iesav
ail
abl
e
(b)Fi
nanci
alaspect
sbasedonanal
ysi
soff
inanci
al
stat
ements
(
c)Busi
ness/
proj
ectr
isks
Invi
ewoft hedy nami
cmarketscenari
o,t
hereis
needtoreviewtherat
ingsofaborroweratregul
ar
i
nter
vals,upgradeordowngradeormaintai
nit.
Joi
nCAI
IBWI
THASHOKonYouTube
ABM MODULE-D
Chapt
er32:
RISKMANAGEMENT&CREDI
T
RATI
NG(PART-
II
)
Whatwewi
llst
udy?
*
Whatar
eRBI
’
sgui
del
inesonCr
edi
tManagement
?
*
Whati
sCr
edi
tInf
ormat
ionManagement
?
*
Whati
sCRI
LC?

RBIGUI
DELI
NESONCREDI
TRI
SKMANAGEMENT:

RBIhasadv
isedt
hebankst
hef
oll
owi
ng:
1.Lender sshouldcarr
youtt heiri
ndependentand
objecti
vecr edi
tapprai
salinallcasesandmustnot
dependoncr edi
tappraisalr
epor t
spreparedby
outsideconsultant
s,especiall
ythein-house
consultantsoftheborrowingent i
ty.
2.Banks/ l
ender
sshoul dcarryoutsensi
ti
vit
y
tests/
scenarioanal
ysis,especi
all
yfor
i
nf r
astruct
ureproj
ects,whichshouldincl
ude
Joi
nCAI
IBWI
THASHOKonYouTube
pr
ojectdel
aysandcostov
err
uns.
3.Lendersshouldascer
taint
hesourceandqual
i
ty
ofequitycapit
albr
oughtinbythepr
omot er
s/
shareholder
s.
4.Minist
ryofCor porat
eAf f
air
shadintr
oducedthe
conceptofaDi rect
orIdenti
fi
cati
onNumber( DI
N)
wit
ht heinsert
ionofSections266Ato266Gof
Compani es(Amendment )Act,2006.
banks/FIshavebeenadvisedtoincludetheDirector
I
dentif
icati
onNumber( DIN)asoneoft hef
iel
dsi n
thedatasubmit t
edbythem toReser v
eBankof
I
ndia/Credi
tInformat
ionCompani es.
ForWi l
fulDefaul
tersbankstoensurethatdir
ector
s
arecorrectl
yidenti
fi
edandi nnocase,persons
whosenamesappeart obesi mil
artothenamesof
di
rectorsappearingintheli
stofwilf
uldefaul
ter
s,
arewrongfullydeni
edcr edi
tfaci
li
ti
esonsuch
grounds.
5.Itisrei
terat
edt hatwhilecarr
yingoutt
hecredi
t
apprai
sal,banksshouldv eri
fyast owhet
hert
he
namesofanyoft hedirector
soft hecompani
es
Joi
nCAI
IBWI
THASHOKonYouTube
appeari
nt heli
stofdefaul
ter
s/wi
lf
uldef
aul
ter
sby
wayofreferencetoDIN/PANetc.
6.Int hecontextofWi lf
ulDefault
er s,RBIguidel
ines
statet hat
,“withav i
ewt omoni t
oringt heenduseof
funds, ift
helendersdesi r
easpeci ficcerti
fi
cati
on
from thebor rowers'audit
orsregarding
diversion/si
phoningoff undsbyt hebor rower,t
he
l
endershoul dawar daseparatemandat etot he
auditor sf
orthepur pose.
7.Inadditiontotheabov e,banksar eadvisedthat
withav i
ewt oensuri
ngpr operend- useoffundsand
preventi
ngdi ver
sion/si
phoni ngoff undsbythe
borrowers, l
enderscouldconsi derengagingthei
r
ownaudi torsforsuchspeci fi
ccer ti
fi
cati
onpurpose
withoutrelyi
ngoncer ti
fi
cationgi venbyborrower'
s
auditor
s.
8.Regi
str
ati
onofsecur
it
ywi
thCERSAI
:
Curr
entlysecurit
yregist
rat
ion,especi
all
y
regi
str
ationofmor tgages,
isdoneatdistri
ctlev
el
andCent ralRegi
str
yofSecur i
ti
sati
onAsset
Reconstructi
onandSecur i
tyInter
estofIndi
a
Joi
nCAI
IBWI
THASHOKonYouTube
(
CERSAI)i
sgener
all
yusedt
oregi
sterequi
tabl
e
mor
tgages.
TheGov er
nmentmandat
etoregist
eral
lty
pesof
mor t
gageswi
thCERSAIwil
lhavetobestr
ict
ly
fol
lowedbybanks.
CREDI
TINFORMATI
ONSYSTEM:
Theneedofcr editinf
ormat
ionsystem wasf elti
n
ordertoalertt
hebanksandf i
nancialinsti
tut
ions
(FI
S)andputt hem onguardagainstbor r
ower swho
havedef aul
tedinthei
rduestootherlending
i
nstit
utions.
Itwasalsoimperati
vetoarrestaccr
etionoffr
esh
NPAsi nthebankingsyst
em throughanef f
ici
ent
system ofcr
editi
nformati
ononbor rowersasafir
st
stepincredi
tri
skmanagement .
Inthiscontext,
ther equir
ementofanadequat e,
compr ehensiv
eandr eli
ablei
nformat i
onsy st
em on
thebor r
owersthroughanef f
icientdatabase
system waskeenlyf eltbytheReser veBank/
Gov ernmentaswel lascr edi
tinsti
tut
ions.
Joi
nCAI
IBWI
THASHOKonYouTube
Cr
edi
tInf
ormat
ionCompani
es(
CICs):
TheWor ki
ngGroup( Chai
rman:ShriN. H.Siddi
qui
)
hadrecommendedt osetupaCr editInformati
on
Bureau(CI
B)withequit
ypart
ici
pationf rom
commer ci
albanks,
FlsandNBFCsr egister
edwith
theReserv
eBank.
Aspertherecommendationsmadebyt heWorki
ng
Group,
CreditI
nfor
mationBureau(I
ndia)Lt
d.,
(CI
BIL)
wassetupbySt at
eBankofI ndi
ainassoci
ati
on
wi
t hHDFCinJanuary2001.
NameofCIBI
Lhasnowbeenchangedt
o
Tr
ansUni
onCIBI
LLi
mited.
I
naddi
ti
on,
3ot hercompanieshav
ebeenper
mit
ted
t
oworkasCreditI
nfor
mationCompani
es.
So,
present
ly,
ther
ear
e4CI
Csi
nIndi
a.
Withav iewt ost
rengtheningthel egalmechanism
tocoll
ect ,pr
ocessandshar ecr editi
nformationon
theborrower sofcrediti
nsti
tuti
ons, theCredit
I
nformat ionCompani es(Regulation)Act,2005was
passedinMay2005byPar l
iament .
Joi
nCAI
IBWI
THASHOKonYouTube

CICs(Credi
tInformationCompany )andCl s(Credi
t
Inst
it
utions)shallkeepthecrediti
nformation
coll
ected/maintainedbythem, updatedregularl
yon
amont hlybasisoratsuchshor teri
nterv
als.
One-ti
memember shi
pfeechargedbytheCI
Cs,
for
CIstobecometheirmembers,
isrest
ri
ctedt
oRs.
10,000each.
Theannualfeeschar
gedbytheCI
Cst
oCI
sshoul
d
notexceedRs.5000each.

Earlier
,thecreditinsti
tuti
ons(CIs)wererequi
redt
o
submi tli
stofSui tfi
ledaccountsofWi l
ful
Def aul
ters(Rs.25l acandabov e)totheCredi
t
InformationCompani es(CICs)
,whodi spl
aythe
sameont hei
rrespectivewebsitesasandwhen
received.
Thelistofnon- suitfil
edaccountsofWil
ful
Default
ers( Rs.25l acandabov e)wasconf
ident
ial
andwasdi ssemi natedbyRBIamongbanksandFI s
onl
yf ortheirownuse.
Joi
nCAI
IBWI
THASHOKonYouTube
Cent
ralReposi
tor
yOfI
nfor
mat
ionOnLar
geCr
edi
ts
(CRI
LC):
TheRBIhassetupaCent r
alReposi
toryof
Informati
ononLar
geCredi
ts(CRI
LC)t ocol
lect
,
store,anddi
ssemi
nat
ecredi
tdatatolender
s.
Thebanksarerequiredtorepor
tcredi
tinformat
ion,
i
ncludi
ngcl
assificat
ionofanaccountasSMA, t
o
CRILConallt
heirborrower
shav i
ngaggr egat
efund-
basedandnon-fundbasedexposureofRs.5cr ore
andabovewiththem.
Howev er,
Cr oploansareexempt
edfrom such
report
ing,but,banksshoul
dcont
inuetorepor
tthei
r
otheragri
cultureloans.
RBIGui deli
nesrequir
ebankst oalsor
eport
outstandingcurrentaccountbal
anceofthei
r
customer s(debi
torcr edi
t)ofRs.1cr
oreandabov
e.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er33:
RESTRUCTURI
NG/REHABI
LITATI
ON&
RECOVERY
Whatwewi
llst
udy?
*
Whati
sCr
edi
tDef
aul
t?
*
Whati
sWi
ll
fuldef
aul
ter
?
*
Whati
sNonCooper
ati
veBor
rower
?

CREDI
TDEFAULT:
Credi
tdef aultmeanstheinabil
it
yorthe
unwil
lingnessofacust omerorcount erpar
tyto
meetcommi t
mentsinrel
ationtolending,t
radi
ng,
or
anyfinancialtr
ansact
ions.Thismayt akethe
fol
lowingf orms:
(a)i
nt hecaseofdi
rectl
endi
ng:pri
nci
pal
/andor
i
nterestamountmaynotberepaidasperthet
erms
ofrepayment;
Joi
nCAI
IBWI
THASHOKonYouTube

(b)int
hecaseofguarant
eesorlet
ter
sofcredi
t:
fundsmaynotbefort
hcomingfrom t
he
consti
tuent
suponcry
stal
li
zat
ionofthel
iabi
li
ty.
STRESSEDASSETS:
Stressedassetsarethoseassetsinwhichthe
defaulthasei
theralr
eadyoccur r
edorwhichare
facingareasonabl
ycer t
ainprospectofdef
ault
.
Forexample,thet
ermloanforanindustr
ialpr
oject
,
i
mpl ementat
ionofwhichhasbeenabandoned, i
sa
str
essedasseteventhoughtherepaymenthasnot
yetfal
lendueaspertherepaymentter
ms.
NPAs:
AsperRBIdirect
ives,banksi
nIndi
ahavetoclassi
fy
thei
rasset
sintoPer f
orming(
Standar
d)asset
sor
Non-per
for
mingasset s(NPAs).
NPAsarefurt
hercl
assi
fi
edi
ntoSub-
standar
d,
doubt
fulandl
ossasset
s.
SMA0:i
rr
egul
arf
or1-
30day
s
SMA1:i
rr
egul
arf
or31-
60day
s
Joi
nCAI
IBWI
THASHOKonYouTube

SMA2:i
rr
egul
arf
or61-
90day
s
Af
ter90day
saccountbecomeNPA.
OnbecomingNPAaccounti
scl
assi
fi
edas
Subst
andardasset
.
I
faccountisNPAorsubstandardformoret
han12
monthstheniti
scal
ledDoubtfulasset
.
I
faccounti
sir
recov
erabl
etheni
tiscal
ledLoss
Asset
.
Theamountofpr ovi
sionrequiredt
obemadeon
theassetport
fol
ioofabankdependsoni t
s
classi
fi
cat
ionint
othef ourcategor
iesofst
andar
d,
substandard,
doubtfulandloss.
Banksshouldbuil
dupprovi
sioni
ngbuf
fer
sfor
absor
binglossesinadownturn.

WI
LFULDEFAULTERS:
Thedef aul
tinpaymentasperagreedt
ermscoul
d
beintent
ionalorduetother
easonsbeyondt
he
contr
oloftheborrower.
Joi
nCAI
IBWI
THASHOKonYouTube

Theint
ent
ionaldef
aul
tisr
efer
redt
oaswi
lf
ul
def
ault
.
AsperRBIgui
del
ines,
a‘wi
lf
uldef
aultwouldbe
deemedtohaveoccur
redi
fanyofthefol
lowi
ng
event
sisnot
ed:
(a)Theunithasdefaul
tedinmeetingit
s
payment/r
epay mentobli
gati
onstothelenderev
en
whenithast hecapaci
tytohonourthesaid
obli
gati
ons.
(b)Theunithasdef aul
tedinmeet ingit
s
payment/repaymentobl i
gationstothelenderand
hasnotutili
sedthef i
nancef rom t
helenderforthe
specif
icpurposesforwhi chf i
nancewasav ail
edof
buthasdivertedthefundsf orotherpurposes.
(c)Theunithasdef aultedinmeet i
ngits
payment/repaymentobl i
gati
onst othelenderand
hassiphonedof fthef undssot hatt
hef undshave
notbeenut i
li
sedf orthespeci f
icpurposeforwhich
fi
nancewasav ail
edof ,norarethefundsav ail
abl
e
withtheuniti
nt heform ofot herassets.
Joi
nCAI
IBWI
THASHOKonYouTube

(d)Theunithasdef aul
tedinmeet ingit
s
payment/repaymentobl i
gati
onst othelenderand
hasalsodisposedof forremov edthemov able
fi
xedasset sorimmov ablepropertygi
venbyhi m or
i
tforthepur poseofsecuringat er
ml oanwithout
theknowledgeoft hebank/ l
ender.
Di
ver
sionandsi
phoni
ngoff
unds
Di
ver
sionofFunds:
Theterm'di
ver
sionoffunds'
,shouldbeconstr
ued
toi
ncludeanyoneoftheundernotedoccur
rences:
(
a)util
isati
onofshort-
ter
m wor
kingcapi
talf
unds
f
orlong-ter
m purposesnoti
nconfor
mitywit
hthe
t
ermsofsanct i
on;
(b)deploy
ingborrowedfundsfor
purposes/act
ivi
ti
esorcreat
ionofasset
sothert
han
thoseforwhichtheloanwassancti
oned;
(c)t
ransf
erri
ngborr
owedfundstothe
subsi
diar
ies/
Groupcompaniesorothercor
por
ates
Joi
nCAI
IBWI
THASHOKonYouTube

bywhat
evermodal
it
ies;
(d)r
outi
ngoffundst
hroughanybankotherthant
he
l
enderbankormembersofconsort
ium wit
hout
pri
orper
missi
onofthelender
;
(e)i
nvestmentinot hercompani
esbywayof
acquir
ingequit
ies/debtinst
rument
swit
hout
approvalofl
enders;
Si
phoni
ngofFunds:
Theterm“ si
phoningoffunds’,
shouldbeconst r
ued
tooccurifanyfundsborrowedf r
om banks/Flsare
uti
li
sedforpurposesunrelat
edt otheoperat
ionsof
theborr
ower ,t
othedetri
mentoft hefi
nancial
healt
hoft heenti
tyorofthelender.
Publ
ishi
ngofphot
ogr
aphsofWi
lf
uldef
aul
ter
s:
Inviewofthesensiti
vi
tyi
nvol
v edandneedto
prev
entthepubli
shingofphotographsofdef
aul
ti
ng
borr
ower/guar
antorinanindi
scri
mi nat
emanner
,
RBIdeci
dedasunder :
(
i)Al
endi
ngi
nst
it
uti
oncanconsi
derpubl
icat
ionof
Joi
nCAI
IBWI
THASHOKonYouTube

thephotographsofonl yt hosebor rower s,


incl
udi
ng
propri
etors/
partners/dir
ect ors/guarantorsof
borrowerfir
ms/ compani es, whohav ebeen
declar
edaswi l
fuldefaultersfollowingthe
mechani sm setoutintheRBIi nstructi
ons.
Thisshallnotapplyt
othenon-wholet i
medi r
ectors
whoar eexempt edfr
om beingconsideredaswilful
default
ersunlessthespeci
alcondit
ions,in
accordancewi t
htheseinst
ruct
ions,aresati
sfi
ed.
(i
i)Thel endingi nst
it
utionsshallformulateapoli
cy
witht heappr ovaloftheirBoardofDi r
ectorswhich
clear l
ysetsoutt hecrit
eriabasedonwhi chthe
deci si
ontopubl ishthephot ographsofaper son
cov eredinpar agraph( i
)abov ewi l
lbetakenby
them sot hatt heapproachi sneitherdi
scriminat
ory
nori nconsistent.

(i
ii
)Thelendi
ngi
nsti
tuti
onsshal
lnotpubli
sh
photogr
aphsofanyotherdef
aul
ti
ngborrowers.
Joi
nCAI
IBWI
THASHOKonYouTube

NON-
COOPERATI
VEBORROWERS:
“Anon- cooperati
v eborrowerisonewhodoesnot
engageconst ructivel
ywi t
hhi slenderbydef aul
ting
i
nt i
mel yrepaymentofdueswhi lehav i
ngabili
tyto
pay,thwar t
inglenders'effort
sforr ecoveryoftheir
duesbynotpr ovidingnecessar yinformati
on
sought, denyi
ngaccesst oasset sfinanced
/col
lateralsecuri
ties,obstructi
ngsal eofsecurit
ies,
etc.
I
neffect
,anon-cooperat
iveborroweri
sadefaul
ter
whodeli
beratel
ystonewallslegi
ti
mateef
for
tsof
t
helenderstorecovert
heirdues.”
Banks/ FIsshoul
dt akethefol
lowingmeasuresin
classif
y i
ng/decl
assify
ingabor r
owerasnonon-
cooper ati
veborrowerandreportinginfor
mat
ionon
suchbor rowerstoCent r
alRepositoryof
InformationonLar geCredi
ts(CRI LC):
(a)Thecutoffl
imi
tforcl
assif
yingborr
owersas
non-cooper
ati
vewouldbethoseborrower
shavi
ng
Joi
nCAI
IBWI
THASHOKonYouTube

aggr
egatefund-basedandnon-
fundbasedfaci
li
ti
es
ofRs.5crorefr
om theconcer
nedbank/FI
.
(b)Banks/FI
swillberequi
redtoreporti
nfor
mation
ontheirnon-
cooperati
veborrowerstoCRILCwithi
n
21day sfr
om thecloseoftherel
evantquart
er.
(c)Boardsofbanks/FI
sshoul
drevi
ewonahal
f-
yearlybasi
sthestat
usofnon-
cooperat
ive
borrowers.
Joi
nCAI
IBWI
THASHOKonYouTube

ABM MODULE-D
Chapt
er33:
RESTRUCTURI
NG/REHABI
LITATI
ON&
RECOVERY(
PART-I
I)
Whatwewi
llst
udy?
*Whatar
etheopt
ionsav
ail
abl
etobankf
orst
ressd
asset
s?
*
Whati
sLokadal
at?
*
Whati
sSARFAESIAct
?

OPTIONSAVAI
LABLETOBANKSFORSTRESSED
ASSETS
Ever
ycr
edi
tdefaul
tdoesnotnecessar
il
yresul
tin
l
osstot
hebank.
I
nmanycases,
bankmaybeabl
etor
ecov
eri
ts
duesf
ull
y.
Inothercases,t
her ecoverymaybewi
thsomeloss
or,i
nthewor stscenariother
emaybenorecov
ery
atall
.
Joi
nCAI
IBWI
THASHOKonYouTube

Thetimel
yactionandanappropr
iat
estrat
egyplay
veryi
mportantrol
einachi
evi
ngthebestrecov
ery
foranyst
ressedasset
.
Whilefor
mulat i
ngthestrategy
,thebankhasto
keepinmindt helegalsyst
em asalsothesoci
al
aspect
spr ev
aili
ngint hecountr
y.
Normall
y,abankf
oll
owsthef
oll
owi
ngst
epsi
n
caseofastr
essedasset
:
(
a)Exi
tfr
om t
heaccount
(
b)Reschedul
ing/
Rest
ruct
uri
ng
(
c)Rehabi
li
tat
ion
(
d)Compr
omi
se
(
e)Legalact
ion
(
f)Wr
it
eof
f
Joi
nCAI
IBWI
THASHOKonYouTube

(
a)Exi
tfr
om t
heAccount
:
Bank'
sfi
rsteff
orti
stoexitf
rom t
heaccountwhi
ch
i
sshowingsignsofst
ress.
Thisispossibl
eonlywhent hesy mpt
omsofst r
ess
aredetectedataveryearl
yst agesothatthe
borrowerisabl
etoshifthi
saccountt oanother
bankwhi chhasadiff
erentriskappet
ite.
Oncethesymptomsbecomemor epronounced,
accept
anceofaccountbyanot
herbankmaynot
materi
ali
ze.
I
ncaseofconsor ti
um/multi
plebanking,
therei
s
goodpossibi
li
tyofotherbankstaki
ngupt heshar
e
ofthebankwantingtoexit
.
butincaseofsolebanki
ng,bankmayf i
nditver
y
dif
fi
culttoexi
taprobl
ematicaccountandithasto
considerot
heropti
onsfordeal
ingwithsuch
accounts.
Joi
nCAI
IBWI
THASHOKonYouTube

(
b)Reschedul
ing/
Rest
ruct
uri
ng:
I
ft hedefaul
tisnotwil
ful,
thebanksnormall
y
rescheduleorrest
ruct
urethel
oansinaccordance
withtherevi
sedcashf l
owestimatesofthe
borrower.
Aspert heRBIdefi
nition,ar estr
ucturedaccountis
onewher ethebank, f
oreconomi corl egalr
easons
rel
ati
ngt otheborrower'sfinancialdi
fficul
ty,
grant
s
totheborrowerconcessi onst hatthebankwoul d
nototherwiseconsider.
(
c)Rehabi
li
tai
on:
Somet i
mes,thebusinessenter
pri
sesfaceadverse
i
nternalormarketcondit
ionsandincurl
ossesfora
l
ongt i
me, r
esult
ingindefaul
tinpaymentofbank's
dues.
Thi
sisspeciall
yt r
ueofthemanufacturing
ent
erpr
ises,whichareconsider
edas“ sick’i
fther
e
i
serosi
oni nthenetwor t
hduetoaccumul at
edcash
l
ossestotheext entof50percentofitsnetwor t
h
dur
ingthepreviousaccounti
ngyearandt heunit
Joi
nCAI
IBWI
THASHOKonYouTube

hasbeeni
ncommer
cialpr
oduct
ionf
oratl
eastt
wo
year
s.
Banksmayexami nethepossi
bil
it
yof
'
Rehabil
it
ati
on'i
nsuchcasesafterunder
taki
ng
det
ail
edv i
abi
li
tystudy.
(
d)Compr
omi
se:
Iftherest
ructur
ing/r
escheduli
ng/rehabil
it
ati
onis
notconsideredviabl
eor,doesnoty iel
dthedesi
red
result
s,bankstrytorecovert
heirduesbyof f
eri
ng
someconcessi onstotheborrower .
Suchdecisionisi
nfl
uencedbytheavai
labil
it
y/
real
isabi
li
tyofthesecur
it
ies,
enfor
ceabil
it
yofthe
documents, et
c.
(
e)LegalAct
ion:
I
ncaseswher eev
enthecompromi
sedoesnot
mater
ial
ize,
bankshavet
oini
ti
ater
ecov
ery
pr
oceedi
ngs.
Theforumsavail
abl
etot
hebanks,
andt
hel
aws
hel
pfulinr
ecover
y,ar
easunder
:
Joi
nCAI
IBWI
THASHOKonYouTube

(
i)Gov
ernmentMachi
ner
y:
Incaseoff
inanceundergovernmentsponsored
schemes,t
herecoveryof
fi
cers,appoi
ntedbyt he
stat
egovernments,
helpi
nrecov er
yofbank'sdues.
(
ii
)Ci
vi
lCour
ts:
Bankscanfil
ethecivi
lsui
tsf
orr
ecov
eryoft
hei
r
duesintheci
vilcour
ts.
Howev
er,
thepr
oceedi
ngsi
ntheci
vi
lcour
tsar
e
ver
ysl
ow.
TheCFSA( committ
eeonf i
nanci
alsect
or
assessment )hasobservedthat,
theaveraget
ime
takeninIndiaforwi
nding-upproceedi
ngsisoneof
thehighestintheworl
d.
Improvement si
nef fecti
veenforcementofcredit
or
ri
ghtsandi nsol
vencysy stemsar ecri
ti
calfor
str
engt heni
ngmar keteffi
ciencyandintegr
ati
onand
forenhancingcommer ci
alconfidenceincontr
act
enforcement.
Joi
nCAI
IBWI
THASHOKonYouTube

(
ii
i)LokAdal
ats:
TheLegalServi
cesAuthori
tyAct
,1987has
confer
redstat
utorybasi
sontheLokAdalat
s
(peopl
e'scour
ts).
TheReserveBankhasconsequentl
yissued
gui
deli
nestocommer ci
albanksandfinancial
i
nsti
tut
ionstomakeincreasi
nguseoft heforum of
LokAdalat
s.
Bankscouldsett
ledi
sput
esinvol
vi
ngamountsup
toRs.20lakhthr
oughthefor
um ofLokAdal
ats.
Further,bankshavealsobeenadvi
sedbyt he
Reser veBankt opar
ti
cipat
eintheLokAdalats
conv enedbyv ari
ousDRTs/DRATsforr
esol v
ing
casesi nvol
vingRs.20lakhandabovetoreducethe
stockofNPAs.
(
iv)DebtRecov
eryTr
ibunal
s(DRTs)
:
Thesearecreatedspecial
lyf
orbanksandFI
sfor
expedi
ti
ngtherecoverycasesinv
olv
ingamount
sin
excessofRs.20lakh.
Joi
nCAI
IBWI
THASHOKonYouTube

Now,
NBFCs,wit
hassetsofov
erRs500cr
ore,
can
al
sof
il
erecov
erycasesi
nDRTs.

(v)SARFAESIAct ,2002:Thepassageofthe
Securi
tisati
onandReconst r
ucti
onofFinancial
AssetsandEnf orcementofSecuri
tyInt
erestAct,
2002( SARFAESIAct )hasprov
idedthenecessary
i
mpet usf orbanksandFIstohastentherecoveryof
thei
rdues.
TheActprov
ides,f
orenforcementofsecur
it
y
i
nter
estforr
eali
sati
onofdueswi t
houtthe
i
nter
vent
ionofcourtsortr
ibunal
s.
TheGov ernmenthasalsonot i
fi
edt heSecuri
ty
Int
erest(Enfor
cement)Rules,2002t oenable
securedcredit
orstoauthori
setheiroff
ici
alsto
enforcethesecuri
ti
esandr ecovertheduesfrom
theborrowers.
SincetheActprov
idesforsal
eoffinanci
alassets
bybanks/FIst
osecurit
isat
ioncompanies
(SCs)/
reconst
ruct
ioncompanies(RCs),gui
deli
nes
Joi
nCAI
IBWI
THASHOKonYouTube

havebeenissuedtoensur
ethatt
heprocessof
assetr
econstruct
ionpr
oceedsonsoundli
nes.
TheIFCI,alongwit
hot herbankingandFIs,
i
ncorporatedanassetr econstr
ucti
oncompany
cal
led‘AssetCareEnterpriseLtd.
'(ACE)i
nJune
2002wi t
hanaut hori
sedcapi t
alofRs.20cror
e.
Morerecentl
y,t
heIDBI,t
heI CI
CIBank,theSBIand
fewotherbankshavejoi
ntl
ypromot edt heAsset
Reconstr
ucti
onCompany( Indi
a)Ltd.(ARCIL)wit
h
anini
ti
alauthor
isedcapi
talofRs.20cr oreandpaid
-upcapi
talofRs.10cror
e.
TheSARFAESIActwasamendedi
n2004,
int
eral
i
a,
to
(a)enabletheborrowertomakeanappl icati
on
beforethedebtrecoverytr
ibunalagainstthe
measurest akenbythesecuredcr edi
torwi t
hout
deposit
inganypor ti
onofthemoneyduewi thi
n45
daysoft akeover
.
(b)provi
det
hatt
hedebtrecov
eryt
ri
bunalshal
l
disposeoft
heappl
i
cati
onasexpedit
iousl
yas
Joi
nCAI
IBWI
THASHOKonYouTube

possibl
ewit
hinaper
iodof60day
sfr
om t
hedat
eof
appl
icati
onand
(c)enabl eanyper sonaggr iev
edbyt heorderbythe
debtr ecover ytr
ibunaltofil
eanappealbef orethe
debtr ecover yappell
atetri
bunal(wi
thin30day sof
j
udgmentofDRT)af terdepositi
ngwi t
hthe
appellatetribunal50percentoft heamountofdebt
duet ohi m asclaimedbyt hesecuredcredit
ororas
determi nedbyt hedebtr ecoverytr
ibunal
,whichever
i
sl ess.
WhenSARFAESIAppl
icabl
e:
1-Accountshoul
dbeNPA
2-Minimum outst
andi
ngshouldbemorethan1Lac.
3-Secur
it
iesshoul
dbechargedtothebank.
WhenSARFAESInotappl
icabl
e:
1-Notappl
icabl
eonAgr
icul
tur
eLand
2-I
fOut
standi
ngi
supt
o1Lac
3-I
fbor
rowerj
asr
epai
d80%ofPr
inci
pleamount
Joi
nCAI
IBWI
THASHOKonYouTube

(
vi)TheI
nsol
vencyandBankr
upt
cyCode,
2016(
IBC)
:
I
thascreatedasi
ngl
elawf
ori
nsol
vencyand
bankr
uptcy
.
TheCodeout
li
nesi
nsol
vencyr
esol
uti
onpr
ocesses.
Theprocessmaybei
nit
iat
edbyei
thert
hedebt
oror
thecr
editor
.
Forcorporat
es,t
heprocesswi l
lhavetobe
completedin180days,andmaybeext endedby90
days,wit
hconsentofmaj or
it
yoft hecr
edi
tors.
TheInsolv
encyandBankr
uptcyBoar
dofI
ndi
ahas
beenestabli
shedast
heregul
ator
.
Li
censedprofessional
swillmanaget
heinsolv
ency
processandwillcontr
olt
heassetsofthedebtor
duri
ngtheprocess.
Therewil
lbet
wosepar
atet
ri
bunal
stoov
erseet
he
process,
(
i)Nat
ionalCompanyLawTr
ibunal
:forCompani
es
Joi
nCAI
IBWI
THASHOKonYouTube

andLi
mit
edLi
abi
li
tyPar
tner
shi
pfi
rms;
and
(i
i)DebtRecov
eryTr
ibunal
:fori
ndi
vi
dual
sand
partner
shi
ps.

(f)Wr i
teoff:Whenal ltheeff
ortstorecovert
he
duesar eexhaust edor, t
hebankisconv i
ncedthat
furtherpursuitofthecasewi l
lnotresul
tany
wor thwhil
er esul
ts,theoutst
andingamountis
wr i
ttenoffbyut i
li
zingtheprovi
sionmadef orthat
accountint hebooks.
I
ftheprovi
sioni
snotenough,
theexcessamounti
s
debi
tedtoP&Laccount
.
Thewrit
eoffdoesnotmeanthatt
hebor
rower
's
l
iabi
li
tyt
othebankhasended.
Ifbanki
sabletor
ecoveranyamountfrom himin
futur
e,i
thasthel
egalr
ightt
oappropr
iatethat
amount.

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