Certified Professional in Cooperative

Banking (CPCB)-Level-I Certification

Course- 2021-22 Batch

Module 2:
Bank Management

2021

Centre for Professional Excellence in Cooperatives (C-PEC),

Bankers Institute of Rural Development (BIRD)

Centre for Professional Excellence in Cooperatives (C-PEC),
Bankers Institute of Rural Development (BIRD)
An autonomous institute established by NABARD.
Sector-H, LDA Colony, Kanpur Road, Lucknow – 226 012, INDIA

Phone +91-522-2421799

Email cpecforccs@gmail.com
Homepage https://bird-cpec.nabard.org/
https://birdlucknow.nabard.org/
 COOPERATIVE BANK MANAGEMENT SYLLABUS

UNIT - 01 ROLE & RESPONSIBILITIES

Fundamentals Meaning, Functions, Importance in Banking

Lesson 01
of Management Business
Role and responsibilities in discharging
HR and duties, Service conditions - Staff Discipline -
Lesson 02
Service Rules
Disciplinary proceedings.
Internal and external environment and
Lesson 03 House Keeping
Maintenance of records and infrastructure.
Timely submission of returns to different
Reports and authorities, i.e., Bank, RCS and other line
Lesson 04
Returns - MIS
departments
Various forums at district level and
Submission of returns under SAMIS,
Lesson 05 Lead Bank Scheme
important recommendations of Usha Thorat
Committee.

UNIT - 02 ORGANIZATIONAL BEHAVIOUR

Psychological contract – Perception –

Individuals
Lesson 01 Perceptual process - Perception in
and Organization
Management
Theories, Role Efficacy – Person Job Fit
Lesson 02 Personality
Theory
Process – Modes - Verbal and Nonverbal-
Lesson 03 Communication barriers to communication - Listening Skills
- Effective Communication

Inter-personal Importance of Interpersonal Relationship,

Lesson 04
Relationship Transactional Analysis, Johari Window

Factors responsible for motivation - Select

Lesson 05 Motivation Theories of Motivation – Application – Job
Characteristics Model
UNIT - 03 PROFIT PLANNING AND BUSINESS DEVELOPMENT
Need and components of profit planning,
Branch as
Lesson 01 branch viability and the concept of transfer
Profit Centre
price mechanism
SWOT and Internal and external environment -
Lesson 02
PESTLE Analysis Preparation of SWOT and PESTLE matrices

Cost, Yield and Margin - Break Even Point,

Lesson 03 Break Even Analysis
Sensitivity Analysis - Case Exercise

Developing Business Business Planning and formulation of result

Lesson 04 oriented strategies for achievement of
Strategies business goals

UNIT - 04 USE OF COMPUTERS IN BANKING

Computer system, Characteristics

and Classification of computers, Computer
Introduction to
Lesson 01 generations, Types of Computers, Digital
Computers
computers, Advantages and Limitations of
Computers.

Computer Functions of computer systems – Input

Unit – Output Unit – Central Processing Unit
Lesson 02 Components – Storage Unit – Memory Buses – Memory
and their Functions and its impact on processing.

Software – Hardware – System

Lesson 03 Computer Operating components – Operating System –
Systems Application Software

Technology Products in a Banking Sector -

Computerization and Back Office Application – Total Branch
Lesson 04
CBS Banking Automation – Core Banking Solutions –
Application Servers – Internet Banking
 Disclaimer

This book is meant for educational and learning purposes. The author of the book
has taken all reasonable care to ensure that the contents of the book do not violate
any existing copyright or other intellectual property rights of any person / institution
in any manner. Wherever possible, acknowledgements / references have been given.
 Table of Contents

Unit 01: Role & Responsibilities................................................................................................ 1

Lesson No. 01: Fundamentals of Management ..................................................................... 2
1.1.1 Definition of Management ........................................................................................ 3
1.1.2 Management Quotes ................................................................................................. 4
1.1.3 Leadership vs. Management ..................................................................................... 5
1.1.4 Henri Fayol’s 14 Principles of Management ............................................................ 7
1.1.5 Banks and Their Functions ...................................................................................... 9
1.1.6 Augmented Bank Management Essentials ............................................................. 11
1.1.7 Management of Rural Cooperative Credit Institutions in India ....................... 15
1.1.8 Benefits of Effective Bank Management ...............................................................20
1.1.9 Let us Sum-Up ................................................................................................... 21
1.1.10 Check Your Progress .................................................................................... 22
1.1.11 References for Further Reading ....................................................................... 24
Lesson No. 02: HR and Service Rules ................................................................................. 25
1.2.1 Introduction ........................................................................................................... 26
1.2.2 Managing Human Resources in Rural Cooperative Banks .................................... 26
1.2.3 Rules of conduct ....................................................................................................28
1.2.4 Staff discipline ....................................................................................................... 31
1.2.5 Discipline Management ......................................................................................... 32
1.2.6 Domestic enquiry .................................................................................................. 34
1.2.7 Let us Sum-Up ........................................................................................................ 37
1.2.8 Check Your Progress ............................................................................................38
1.2.9 References for Further Reading ........................................................................... 40
Lesson No. 03: House Keeping .......................................................................................... 41
1.3.1 House Keeping – Introduction ............................................................................... 42
1.3.2 Need and Components of Proper House Keeping ................................................. 42
1.3.2.1 Inter-office transactions ...................................................................................... 42
1.3.2.2 Sundry and Suspense account............................................................................. 43
1.3.2.3 Internal Checks and Controls.............................................................................. 43
1.3.3 Cash Management ................................................................................................. 52
1.3.4 Preservation of Records ........................................................................................ 53
1.3.5 Training of Staff ..................................................................................................... 54
1.3.6 Customer Service ................................................................................................... 54
1.3.7 Let us Sum-Up ....................................................................................................... 57
1.3.8 Check Your Progress ............................................................................................ 58
 1.3.9 References for Further Reading ........................................................................... 60
Lesson No. 04: Reports and Returns - MIS ........................................................................ 61
1.4.1 What is Management Information System? .......................................................... 62
1.4.2 Role of MIS in Banking Industry .......................................................................... 62
1.4.3 Types of returns...................................................................................................... 64
1.4.4 Analysis of Returns / Reports ............................................................................... 70
1.4.5 Reporting by Rural Cooperative Banks to NABARD ............................................. 71
1.4.6 Let us Sum-Up ....................................................................................................... 76
1.4.7 Check Your Progress .............................................................................................. 76
1. 4.8 References for Further Reading .......................................................................... 78
Lesson No. 05: Lead Bank Scheme ..................................................................................... 79
1.5.1 Lead Bank Scheme – Genesis ........................................................................... 80
1.5.2 Objectives of Lead Bank Scheme and Functions of Lead Bank ......................... 81
1.5.3 Governance Structures under Lead Bank Scheme ............................................82
1.5.4 Implementation of Lead Bank Scheme..............................................................86
1.5.5 Review and Revamp of the LBS from time to time............................................89
1.5.6 Let us Sum-Up ................................................................................................... 93
1.5.7 Check Your Progress .......................................................................................... 93
1.5.8 References for Further Reading ........................................................................ 95
Unit 02: Organizational Behaviour ......................................................................................... 96
Lesson No. 01: Individuals and Organisations .................................................................. 97
2.1.1 Introduction .....................................................................................................98
2.1.2 Behaviour Analysis at Different Levels ..............................................................98
2.1.3 Causes of Individual Behaviour ........................................................................ 99
2.1.4 Factors influencing an individual’s attitude .................................................... 100
2.1.5 Characteristics of the perceiver ........................................................................... 103
2.1.6 Application of perception in management .......................................................... 104
2.1.7 Impacts of perception in the organization ......................................................... 105
2.1.8 Let us Sum-Up..................................................................................................... 106
2.1.9 Check Your Progress ........................................................................................... 106
2.1.10 References for Further Reading ........................................................................ 107
Lesson No. 02: Communication ....................................................................................... 109
2.2.1 Introduction .................................................................................................... 110
2.2.2 What is Communication? ............................................................................... 110
2.2.3 Types of Communication .................................................................................. 111
2.2.4 Process of Communication ............................................................................... 113
2.2.5 Barriers to communication ..............................................................................114
 2.2.6 Skills for Effective Communication ..................................................................116
2.2.7 Let us Sum-Up ................................................................................................. 117
2.2.8 Check Your Progress ........................................................................................ 117
2.2.9 References for Further Reading....................................................................... 120
Lesson No. 03: Personality ..........................................................................................121
2.3.1 Personality – Concept ..................................................................................... 122
2.3.2 Determinants of Personality ............................................................................ 122
2.3.3 Characteristics of Personality .......................................................................... 123
2.3.4 Development of Personality............................................................................. 124
2.3.5 Common Traits That Make a Good Character ................................................. 126
2.3.6 Role efficacy in Employment ........................................................................... 127
2.3.7 Let us Sum-Up ................................................................................................ 128
2.3.8 Check Your Progress .......................................................................................... 128
2.3.9 References for Further Reading ......................................................................... 130
Lesson No. 04: Inter-Personal Relationship ............................................................... 131
2.4.1 What is Interpersonal Relationship? ............................................................. 132
2.4.2 Why Interpersonal Relationships? ...................................................................... 132
2.4.3 Types of Interpersonal Relationships .............................................................. 133
2.4.4 Interpersonal relationships in workplaces .......................................................... 133
2.4.5 Stages in the formation of effective interpersonal relationship .......................... 134
2.4.6 Factors affecting Interpersonal Relationship .................................................. 136
2.4.7 How to Improve Interpersonal Relationship at Workplace? .............................. 137
2.4.8 Let us Sum-Up ................................................................................................ 138
2.4.9 Check Your Progress ....................................................................................... 139
2.4.10 References for Further Reading ....................................................................141
Lesson No. 5: Motivation ................................................................................................. 142
2.5.1 What is Motivation?......................................................................................... 143
2.5.2 Importance of Motivation ................................................................................ 143
2.5.3 Types of Motivation ......................................................................................... 144
2.5.4 Motivation Process .......................................................................................... 145
2.5.5 Factors responsible for Staff Motivation ......................................................... 145
2.5.6 Various theories on motivation ....................................................................... 146
2.5.7 Let us Sum-Up.................................................................................................... 150
2.5.8 Check Your Progress .......................................................................................... 150
2.5.9 References for Further Reading .......................................................................... 152
Unit 03: Profit Planning and Business Development ............................................................ 154
Lesson No. 1: Branch as a Profit Centre .......................................................................... 155
 3.1.1 Introduction ........................................................................................................ 156
3.1.2 What constitutes profit in Banks? ...................................................................... 157
3.1.3 Why Profit is necessary in any business ............................................................. 157
3.1.4 Profitability and Viability of a Branch as a Profit Centre ................................... 159
3.1.5 Transfer Price Mechanism.................................................................................. 163
3.1.6 Let us Sum-Up ..................................................................................................... 167
3.1.7 Check Your Progress ............................................................................................ 168
Lesson No. 2: SWOT and PESTLE Analysis...................................................................... 171
3.2.1 Introduction ........................................................................................................ 172
3.2. 2 SWOT Analysis................................................................................................... 173
3.2. 3 STEP / PEST / PESTLE Analysis ....................................................................... 178
3.2. 4 Let us Sum-Up ................................................................................................... 181
3.2. 5 Check Your Progress .......................................................................................... 182
Lesson No. 3: Break-Even Analysis .................................................................................. 186
3.3.1 Concept of Break-Even Point (BEP) ................................................................... 187
3.3.2 Deriving a Break-Even Point (BEP) .................................................................... 187
3.3.3 When is Break-Even Analysis used......................................................................191
3.3.4 Benefits of Break-Even Analysis ..........................................................................191
3.3.5 Sensitivity Analysis ............................................................................................. 192
3.3.6 Let us Sum-Up ..................................................................................................... 193
3.3.8 References for further Readings ......................................................................... 196
Lesson No. 4: Developing Business Strategies.................................................................. 197
3.4.1 Introduction ........................................................................................................ 198
3.4.2 Strategic Management Process ............................................................................ 199
3.4.3 Why to adopt Business Development Strategies in Banks? ............................... 201
3.4.4 Marketing Strategy for Banks ..............................................................................205
3.4.5 Let us Sum-Up ..................................................................................................... 207
3.4.6 Check your progress............................................................................................ 207
3.4.7 References for further reading ............................................................................ 210
Unit 04: Use of Computers in Banking ........................................................................ 212
Lesson No. 1: Introduction to Computers .................................................................... 213
4.1.1 Introduction ..................................................................................................... 214
4.1.2 What is computer System? .............................................................................. 215
4.1.3 Characteristics of a Computer ......................................................................... 215
4.1.4 Computer Generations..................................................................................... 216
4.1.5 Classification of Computers ............................................................................. 218
4.1.6 Advantages of a Computer ............................................................................... 221
 4.1.7 Limitations of a Computer ............................................................................... 221
4.1.8 What is Internet?................................................................................................. 222
4.1.9 Let’s us Sum-Up ............................................................................................... 223
4.1.10 Check Your Progress ........................................................................................ 223
4.1.11 References for Further Reading .................................................................... 226
Lesson No. 2: Components of Computers and their Functions .................................. 227
4.2.1 Introduction to Hardware and Software .........................................................228
4.2.2 Functional Components of a Digital Computer ............................................... 231
4.2.3 Hardware Parts of a computer with their functions ........................................ 233
4.2.4 Let us Sum-Up............................................................................................... 237
4.2.5 Check your Progress .........................................................................................238
4.2.6 References for Further Reading .................................................................... 241
4.3.1 Introduction ..................................................................................................... 243
4.3.3 Types of Computer Operating Systems ...........................................................244
4.3.4 Functions of Operating System .......................................................................250
4.3.5 Let us Sum-Up .................................................................................................... 251
4.3.6 Check Your Progress ........................................................................................ 252
4.3.7 References for Further Reading....................................................................... 254
Lesson No. 4: Computerization and CBS Banking ........................................................... 255
4.4.1 Introduction ..................................................................................................... 256
4.4.2 Technology Products in a Banking Sector: .......................................................... 256
4.4.3 Types of Computers Used in Banks ................................................................. 257
4.4.4 Types of Bank Computerisation .......................................................................... 258
4.4.5 Application Software used in Core Banking Solutions ....................................... 260
4.4.5.2 Data Base server .............................................................................................. 262
4.4.6 Advantages of Core Banking Solutions................................................................264
4.4.7 National Financial Switch .............................................................................. 267
4.4.8 Let us Sum-Up .................................................................................................... 268
4.4.9 Check Your Progress .................................................................................... 268
4.4.10 References for Further Reading ................................................................... 270
 Unit 01: Role & Responsibilities

Lesson No. 01 Fundamentals of Management

Lesson No. 02 HR and Service Rules

Lesson No. 03 House Keeping

Lesson No. 04 Reports and Returns - MIS

Lesson No. 05 Lead Bank Scheme

1
Lesson No. 01: Fundamentals of Management

1.1.1 Definition of Management

1.1.2 Management Quotes
1.1.3 Leadership vs Management
1.1.3.1 Major differences between Leaders and Managers
1.1.4 Henri Fayol’s 14 Principles of Management
1.1.5 Banks and their Functions
1.1.5.1 General Functions of Banks
1.1.5.2 Origin and Evolution of Banks
1.1.5.3 Signals of Further Change
1.1.5.4 Priorities for Future of Retail Banking In India
1.1.6 Enhanced Management Essentials for Indian Banks
1.1.6.1 Factors compelling superior Bank Management Skills
1.1.6.2 Enhanced need for Specialised Management Functions
1.1.6.3 Levels and Functions of Bank Management
1.7 Rural Cooperatives and Cooperative Credit
1.1.7.1 Cooperatives and Underlying Seven Basic Principles
1.1.7.2 Cooperative Credit Structure in India
1.1.7.3 Regulatory Control over Rural Cooperative Banks (RCBs)
1.1.7.3.1 Banking Regulation Act, 1949 (AACS)
1.1.7.3.2 Banking Regulation (Amendment) Act, 2020
1.1.8 Benefits of Effective Bank Management
1.1.9 Let us Sum-Up
1. 1.10 Check Your Progress
1.1.11 References for Further Reading

2
1.1.1 Definition of Management

Management is an art of combining the efforts and resources to accomplish a task. If

we look into the dictionary definition of management, there are many kinds of
explanations but all revolve around accomplishing of work / tasks in and by a group.
Generally management definitions are more in depth and tailored toward Business
Management. “Management” (from old French ménagement “the art of conducting,
directing”; from Latin manu agere “to lead by the hand”) characterises the process of
leading and directing all or part of an organization, often a business through
deployment and manipulation of resources (human, financial, material, intellectual or
intangible) - Source : en.wikipedia.org/wiki/Management.

Some of the definitions given hereunder can clear up the basic idea and implications
to discuss the topic further:

 A process of getting activities completed efficiently with and through other people.
 The process of planning, leading, organizing and controlling people within a group
in order to achieve goals. This definition stresses the activities that are necessary for
reaching particular goals.
 The guidance and control of action required to execute a program. This implies that,
for management to be effective, there needs to be some type of defined approach or
system in place. This system becomes the plan and management is guiding others in
following that plan.
 Management functions are not limited to managers and supervisors. Every member
of the organization has some management and reporting functions as part of their
job. It consists of a sequence of continuing cycle of three primary activities :
a) Establishment of a plan-that becomes the road map for the work to be done.
b) Allocation of resources-to implement the plan.
c) Measurement of results-to compare end product with that originally
envisioned.

This definition of management focuses on management as a process of accomplishing

work through efforts of others. In other words, effective coordination and utilization
of resources, such as capital, plant, materials, and labour helps to achieve defined
objectives with maximum efficiency. Skilled managers can accomplish much more
through others than they can through their own single efforts. To conclude, it is the
3
process of achieving the objectives of a business entity by bringing together human,
physical and financial resources in an optimum combination and making the best
decision while taking into consideration its operating environment.

1.1.2 Management Quotes

 The conventional definition of management is getting work done through people,

but real management is developing people through work. ~ Agha Hasan Abedi
 Effective leadership is putting first things first. Effective management is discipline,
carrying it out. ~ Stephen Covey
 Management is efficiency in climbing the ladder of success; leadership determines
whether the ladder is leaning against the right wall. ~ Stephen Covey
 Management is doing things right, leadership is doing the right things. ~ Unknown
 Leadership is working with goals and vision; management is working with
objectives. ~ Russel Honore
 Good management is the art of making problems so interesting and their solutions
so constructive that everyone wants to get to work. ~ Paul Hawken
 Lots of folks confuse bad management with destiny. ~ Kin Hubbard
 Good management consists of showing average people how to do the work of
superior people. ~ John D. Rockefeller
 No business in the world has ever made more money with poorer management. ~
Bill Terry
 A manager is who finds the right people for the right jobs. Management is matching
those individuals with the right positions. ~ Marcus Aurelius
 A good manager is a man who isn’t worried about his own career but rather the
careers of those who work for him. ~ HSM Burns
 Management by objectives works – if you know the objectives. Ninety percent of
the time you don’t. ~ Peter Drucker
 The first rule of management is delegation. Don’t try and do everything yourself
because you can’t. ~ Anthea Turner
 Divorced from ethics, leadership is reduced to management and politics to mere
technique. ~ James MacGregor Burns
 Management's job is to convey leadership's message in a compelling and inspiring
way. Not just in meetings, but also by example. ~ Jeffrey Gitomer

4
1.1.3 Leadership vs. Management

Leadership and management are often considered to have overlapping functions.

While this can be true, these two terms have different meanings and they shouldn’t be
used interchangeably. Both imply a unique set of functions, characteristics and skills
that share similarities. A manager is selected based on specific technical skills,
knowledge and expertise. On the contrary, the greatest leadership skill is to influence
and inspire people. Leadership is about developing what the goals should be. It’s more
about driving change. Management is the process of working with others to ensure
the effective execution of a chosen set of goals.

A lot of leaders know what they want from the people they lead, but are not particularly
skilled in getting the desired results. Often, leaders in this position end up blaming
the people they lead. If their ideas are implemented, it will be done by another leader
who embraces the management function. Management is often an art of taking
abstract concepts and communicating them in a clear, quantitative way. Management
skills are a subset of leadership skills. Leaders have a vision, a goal and a sense of
purpose, but the ability to plan and execute is with managers only. A leader is someone
who knows where to go. Management skills are how they actually get there.

Top 10 Management Skills Top 10 Leadership Skills

1. Interpersonal skills 1. Communication

2. Communication 2. Courage and Motivation
3. Honesty and Confidence 3. Delegation and Cooperation
4. Decisiveness and Organization 4. Positivity
5. Delegation 5. Integrity and Trustworthiness
6. Forward planning 6. Vision and Creativity
7. Strategic thinking 7. Feedback
8. Problem-solving 8. Responsibility
9. Commercial awareness 9. Focus and Commitment
10. Mentoring and Empathy 10. Flexibility

5
1.1.3.1 Major differences between Leaders and Managers

While management is an important part of leadership, the reverse may not necessarily
be true. Leadership and management are often considered to have overlapping
functions. While this can be true, these two terms have different meanings and they
shouldn’t be used interchangeably. Both imply a unique set of functions,
characteristics and skills that share similarities. However, they show prominent
differences in some circumstances. For example, some managers do not practice
leadership, while some people lead without a managerial role.

Leaders Set the Vision, Managers Follow It: Leaders are visionaries. Most of
them have a clear vision of where they want their organizations to be in the future.
However, they themselves are not the only ones responsible for making that vision
come true. Managers are responsible for keeping employees aligned with the core
company values and goals. Leaders coach and managers direct.

Leaders Think Ideas, Managers Think Execution: Leaders are more about
looking for opportunities for improvement on the organizational level. In other words,
leaders look for answers to “what and why - what should be done”, while managers
always look for answers to “how and when - how things get done”. Leaders create a
vision while managers create goals.

Leaders Build Relationships, Managers Build Systems and Processes:

Leaders have a great power to inspire and focus on people. They know who their
stakeholders are and spend most of their time with them. Managers focus on the
structures necessary to set and achieve goals. They focus on the analytical and ensure
systems are in place to attain desired outcomes.

Leaders Look in the Future, Managers Work in the Present: the manager’s
most important goal is to achieve organizational goals by implementing processes and
procedures around budgeting, organizational structuring, and staffing. On the other
hand, leaders tend to think ahead and capitalize on future opportunities.

Leaders Shape the Culture, Managers Endorse It: Culture is a system of

values, beliefs and behaviours that shape and determine how an organization operates
and how the work gets done.

6
Leaders Take Risks, Managers Control Risk: Leaders are willing to try new
things even if they may fail miserably. They know that failure is often a step on the
path to success. Managers work to minimize risk. They seek to avoid or control
problems rather than embracing them.

1.1.4 Henri Fayol’s 14 Principles of Management

During last centuries, organizations such as production factories had to deal with
management in practice. At that time there were not many external management
tools, models and methods available. Jules Henri Fayol, a French coal-mining
engineer, explored this comprehensively and as a result, he synthesized the 14
principles of management. He published his principles of management and research
in a book ‘General and Industrial Management’ (1916). These 14 principles of
management hold valid and are used even today to manage an organization and are
beneficial for prediction, planning, decision-making, organization and process
management, control and coordination.

i. Division of Work- Henri believed that segregating work in the workforce amongst
the worker will enhance the quality of the product. Similarly, he also concluded that
the division of work improves the productivity, efficiency, accuracy and speed of the
workers. This principle is appropriate for both the managerial as well as a technical
work level.

ii. Authority and Responsibility- These are the two key aspects of management.
Authority facilitates the management to work efficiently and responsibility makes
them responsible for the work done under their guidance or leadership.

iii. Discipline- Without discipline, nothing can be accomplished. It is the core value
for any project or any management. Good performance and sensible interrelation
make the management job easy and comprehensive. Employees good behaviour also
helps them smoothly build and progress in their professional careers.

iv. Unity of Command- This means an employee should have only one boss and
follow his command. If an employee has to follow more than one boss, there begins a
conflict of interest and can create confusion.

7
v. Unity of Direction- Whoever is engaged in the same activity should have a unified
goal. This means all the person working in a company should have one goal and motive
which will make the work easier and achieve the set goal easily.

vi. Subordination of Individual Interest- This indicates a company should work

unitedly towards the interest of a company rather than personal interest. Be
subordinate to the purposes of an organization. This refers to the whole chain of
command in a company.

vii. Remuneration- This plays an important role in motivating the workers of a

company. Remuneration can be monetary or non-monetary. However, it should be
according to an individual’s efforts they have made.

viii. Centralization- In any company, the management or any authority responsible

for the decision-making process should be neutral. However, this depends on the size
of an organization. Henri Fayol stressed on the point that there should be a balance
between the hierarchy and division of power.

ix. Scalar Chain- Fayol on this principle highlights that the hierarchy steps should
be from the top to the lowest. This is necessary so that every employee knows their
immediate senior also they should be able to contact any, if needed.

x. Order- A company should maintain a well-defined work order to have a favourable

work culture. The positive atmosphere in the workplace will boost more positive
productivity.

xi. Equity- All employees should be treated equally and respectfully. It’s the
responsibility of a manager that no employees face discrimination.

xii. Stability- An employee delivers the best if they feel secure in their job. It is the
duty of the management to offer job security to their employees.

xiii. Initiative- The management should support and encourage the employees to
take initiatives in an organization. It will help them to increase their interest and make
then worth.

xiv. Esprit de Corps- It is the responsibility of the management to motivate their

employees, be supportive of each other and remain united. Developing trust and
mutual understanding will lead to a positive strength and united work environment.

8
1.1.5 Banks and Their Functions

1.1.5.1 General Functions of Banks

A bank is a financial institution which accepts deposits, pays interest on pre-defined

rates, clears cheques, makes loans, and often acts as an intermediary in financial
transactions. It also provides other financial services to its customers such as wealth
management, investment services, currency exchange, safe deposit boxes and more.

An indicative list of services offered by Indian Banks is as under:

 Deposits, Payments and Remittance Services

 Loans and Overdrafts
 Currency Exchange
 Financial Consultancy
 Online Banking
 Mobile Banking
 Home Banking
 Credit and Debit Cards
 Lockers
 Money Transfers
 Investment Banking
 Wealth Management
 Several auxiliary services - guarantees, solvency certificates, MFs, insurance, etc.

Bank management refers to the process of managing all the above statutory activities
with a view to profit.

1.1.5.2 Origin and Evolution of Banks

The origin of bank or banking activities can be traced to the Roman Empire during the
Babylonian period. It was being practiced on a very small scale as compared to modern
day banking and frame work was not systematic. It has evolved from barbaric banking
where commodities were loaned to modern day banking system, which caters to a wide
range of financial services. The evolution of banking system was gradual with growth
in each and every aspect of banking. Banking system has witnessed unprecedented
9
 growth and will be undergoing it in future too with advent and advancement in
technology. In the banking industry of India, there has been extraordinary growth that
has replaced traditional banking methods with simplified, accurate, and fast banking
methods. Today, we have a fairly well-organized and highly sophisticated banking
system that includes new-generation banks along with traditional banks.

1.1.5.3 Signals of Further Change

Retail banking is facing an even more complex environment than before. While the
COVID-19 pandemic has reshaped the socio-economic landscape, customers’ needs
and expectations continue to evolve. Here are various signals showing the need
for further change in the retail banking industry.

 Customers: Accelerating customer expectations have shifted the banks’ priorities.

Banks that can deliver seamless and personalized customer experiences will be best
placed and will grow their market share.

 Competitive: The existing banks are being challenged by Neo banks and other non-
traditional participants. The customers will turn to such alternative providers if their
needs are met more effectively.

 Economic: The adverse economic headwinds of a pandemic will challenge retail

banking margins. It is causing retail banks to improvise and expand their current
mode of operations to digital platforms and other available options to achieve
profitable growth.

 Regulatory: Retail banks will need to consider how well they are organized to comply
with regulations focused on increasing competition, supporting vulnerable customers,
greater resilience, and increased cyber security.

 Technological: Banks will need to invest in current technologies to enable profitable

growth and substantially reduce the cost of operations through automated processes.

1.1.5.4 Priorities for Future of Retail Banking In India

The traditional banking business model is simply not viable for the holistic growth of
the economy. Banks need to take a stance against the future landscape and

10
uncertainties, so here are priorities for the future of retail banking that will take India
a step closer to full financial inclusion.

Customer-Centric Business Model: Banks will organize themselves according to

their customers instead of products or channels. They will recognize their customers’
uniqueness and will tailor their offerings to meet their needs rather than pushing their
products.

Social Media Will Be the Media: In the future of retail banking, social media will
be the primary medium to connect, engage, inform and understand the customers’
behaviour. It will also be a platform where customers would research and compare
banks’ offerings.

Customer Relationship: Enhancing customer trust is the foremost

investment priority for the retail banking sector. Customers want their banks to be
socially responsible. Banks will remarkably benefit by taking a leadership role in the
public debate. Banks will inform and educate society on basic financial skills,
economics and the fundamental benefits of banking.

Cyber Security: Cyber security is crucial to maintaining long-term customer

relationships because customers are growing more concerned about data privacy and
security as their personal information and financial life migrate online. Banks need to
develop strategies that are aligned with their business requirements, risk-
management protocols and regulatory requirements.

Business Process Outsourcing: Outsourcing various retail banking processes

through Customer Service Point would save time and cost of operations. Besides, it
will help banks in concentrating on core business areas. Banks will devote more time
to marketing, brand building, and customer services.

1.1.6 Augmented Bank Management Essentials

The financial services industry including retail banking is undergoing dramatic

changes because of rapidly changing customer behaviour, increasing expectations,
channel proliferation, disruption, innovation, and new technologies. All this calls for
bank management, which further ensures quality service to customers and a win-win
situation between the customer, the banks and the government.

1.1.6.1 Factors compelling superior Bank Management Skills

11
Some of the recent trends in the banking and financial sector of India and all these
new technologies are predicting a reshape in the banking industry environment. The
future is going to bring upon a revolution of sorts with historical changes in traditional
models. The massive shift in the landscape has few challenges. Meanwhile, the
competition from the foreign and private sector banks have strained the government
regulators, nationalized banks and financial institutions to adopt new technology in
order to stay relevant in the race.

Some of the key areas undergoing faster changes in Indian banking that need the
comparable superior management adoptions to remain competitive are:

Digitization: Reduced cost of various banking procedures, improved revenue

generation and reduced human error. Along with increased customer satisfaction, it
has enabled the customers creating personalized solutions for their investment plans
and improve the overall banking experience.

Enhanced use of Mobile Banking: one of the most dominant current trends in
banking systems.

UPI (Unified Payments Interface): It enables secure and instant inter-bank

transactions with direct involvement of RBI and NPCI.

Block Chain: Block chain is the latest buzzword. The technology that works on the
principles of computer science, data structures and cryptography and is the core
component of crypto currency is said to be the future of banking and financial services
globally. Block chain uses technology to create blocks to process, verify and record
transactions, without the ability to modify it.

Artificial Intelligence Robots: Several private and nationalized banks in India

have started to adopt chatbots or Artificial intelligence robots for assistance in
customer support services. Also, it can recognize fraudulent behaviour, collate surveys
and feedback and assist in financial decisions.

Rise of Fintech Companies: Previously, banks considered Fintech companies a

disrupting force. Besides easy access, these companies have led to a massive
improvement in services, customer experience, and reduced price.

Digital-Only Banks: With the entire banking and financial services industry
jumping to digital channels, digital-only banks have emerged to create paperless and

12
branchless banking systems. This is a new breed of banking institutions that are
overtaking the traditional models rapidly. These banks can be accessed on mobile,
computers, and tablets. The growing popularity of these banks is said to be a real threat
to traditional banks.

Cloud Banking: Use of cloud-based technology means improved flexibility and

scalability with increased efficiency and easier integration of newer technologies and
applications, faster services and solutions, and improved data security. In addition,
the banks will not have to invest in expensive hardware and software as updating the
information is easier on cloud-based models.

Biometrics: With a combination of encryption technology and OTPs, biometric

authentication is forecasted to create a highly-secure database protecting it from leaks
and hackers attempts.

Wearables: With smart watch technology, the banking and financial would be just
a click on a user-friendly interface on their wearable device.

1.1.6.2 Enhanced need for Specialised Management Functions

Concerns and elements of entrepreneurship culture in general and banking system

broadly include: liquidity management, asset management, liability management and
capital management. Reliability of the bank management is determined by the
following characteristics:

 Management expertise in strategic analysis, planning, policy development and

management functions
 Quality planning for financial resource generation and their effective utilisation
 Asset and Liability Management
 Capital Management
 Liquidity Management
 Risk Management (Credit, Market, Operational, Interest Rate, Currency and
Capital risks)
 Management of Human Resources
 Creation of control systems: audit and internal audit , monitoring of profitability
and risks liquidity

13
 Unified information technology system: integrated automation of workflow,
accounting, current analysis and control, strategic planning

1.1.6.3 Levels and Functions of Bank Management

Cooperatives are special type of institutions that have to combine the credit business
objectives with social objective and reflect the principles of democratic control.

Top level management: Top management (the Board of Directors) is the ultimate
authority in a bank. It finalizes the overall objectives and formulates the master
strategy and broad business policies. It also evaluates the result of the efforts of all
other managers and personnel. The chief executive at the top-level management may
be the General Manager/Managing Director. He/she issues instructions for
implementation of policies formulated by the Board of Directors and takes all
necessary steps to accomplish the objectives. The main functions of top level
management are:

 Determining the business objectives

 Formulating business policies and preparation of plans for the objectives
 Designing an appropriate organizational framework
 Bringing together the resources to put plans into practice
 Exercising effective supervision over all the departments
 Introducing suitable remedial measures if shortfalls are noticed.

Middle level Management: The middle management comprises of heads of

departments such as Senior Manager/Dy. Manager. Middle level managers are
expected to understand and support /execute the ideas and policies of the top
management. They have to face the pressure of the supervisory staff reporting to them.
The main functions of middle level management are:

 Selection of the efficient executive and staff

 Introduction of proper procedures and systems
 Deciding the routine for orderly functioning of the departments
 Motivating personnel for higher productivity and rewarding them

14
 Collecting reports and statistical information and similar other records about the
work done in the department and forwarding the same with necessary observations
to the top-level management
 Ensuring better performance by revising departmental policies

Lower level Management: The lower level management includes supervisors and
sub-department executives assisted by workers and clerks. Their authority is limited.
They have to abide by the decisions taken by the higher levels of management and are
also accountable to their superiors. The plans and policies of the top-level
management may fail, if the supervisors and workers do not provide wholehearted
support and cooperation. The managers at the lower level play an important role in
raising the morale of subordinate staff as they are directly and closely connected with
their subordinates. The lower level managers need technical and supervisory skills in
order to get the work done from their subordinates. The main function of lower level
management is:

 Directing and supervising the entire work force in the office and in the sales field.
 Acting as a link between the higher management and rank and file of workers.
 Communicating the management’s decisions and policies to workers
 Reporting actual performance of the workmen along with their difficulties and
problems to the higher level management.
 Maintaining discipline among workers assigned to them or to their departments.

1.1.7 Management of Rural Cooperative Credit Institutions in India

Cooperative movement in India was started primarily for dealing with the problem of
rural credit. The history of Indian cooperative banking started with the passing of
Cooperative Societies Act in 1904. The objective of this Act was to establish
cooperative credit societies “to encourage thrift, self-help and cooperation among
agriculturists, artisans and persons of limited means.” Many cooperative credit
societies were set up under this Act. The Cooperative Societies Act, 1912 recognized
the need for establishing new organizations for supervision, auditing and supply of
cooperative credit. These organizations were —

 A union of people - consisting of primary societies – however, agricultural credit

institutions dominated the entire cooperative credit structure (PACS);

15
 Central Cooperative Banks at district levels; and
 State Cooperative Banks at provincial levels

As the word “Cooperative” indicates, control and operational management remains

with the people or its members. Before going into regulatory aspects, confusing due
to duality of control and financial discipline enforced by Govt. of India in September
2020, we should learn first about basic cooperative principles as applicable
throughout the world in following paragraph.

1.1.7.1 Cooperatives and Underlying Seven Basic Principles

Cooperatives around the world operate according to the same set of core principles
and values, adopted by the International Co-operative Alliance (ICA) with its
Headquarters in Geneva. Cooperatives trace the roots of these principles to the first
modern cooperative founded in Rochdale, England in 1844. These principles are
clearly visible in the definition of “Cooperatives” given by ICA in 1995. It defines
Cooperatives as - an autonomous association of persons united voluntarily
to meet their common economic, social, and cultural needs and
aspirations through a jointly owned and democratically controlled enterprise.
Seven Cooperative Principles are:

i. Open and Voluntary Membership - Membership in a cooperative is open to all

people who can reasonably use its services and stand willing to accept the
responsibilities of membership, regardless of race, religion, gender, or economic
circumstances.

ii. Democratic Member Control - Cooperatives are democratic organizations

controlled by their members, who actively participate in setting policies and making
decisions. Representatives (directors/trustees) are elected among the membership
and are accountable to them. In primary cooperatives, members have equal voting
rights (one member, one vote); cooperatives at other levels are organized in a
democratic manner.

iii. Members’ Economic Participation - Members contribute equitably to, and

democratically control, the capital of their cooperative. At least part of that capital
remains the common property of the cooperative. Members allocate surpluses for any
or all of the following purposes: developing the cooperative; setting up reserves;

16
benefiting members in proportion to their transactions with the cooperative and
supporting other activities approved by the membership.

iv. Autonomy and Independence - Cooperatives are autonomous, self-help

organizations controlled by their members. If they enter into agreements with other
organizations, including governments, or raise capital from external sources, they do
so on terms that ensure democratic control as well as their unique identity.

v. Education, Training, and Information - Education and training for members,

elected representatives (directors/trustees), CEOs, and employees help them
effectively contribute to the development of their cooperatives. Communications about
the nature and benefits of cooperatives, particularly with the general public and
opinion leaders, help boost cooperative understanding.

vi. Cooperation among Cooperatives - By working together through local,

national, regional and international structures, cooperatives improve services, bolster
local economies and deal more effectively with social and community needs.

vii. Concern for Community - Cooperatives work for the sustainable development
of their communities through policies supported by the membership.

1.1.7.2 Cooperative Credit Structure in India

The rural co-operative credit system in India is primarily mandated to ensure flow of
credit to the agriculture sector. It comprises short-term and long-term co-operative
credit structures. The short-term co-operative credit structure operates with a three-
tier system - Primary Agricultural Credit Societies (PACS) at the village level, Central
Cooperative Banks (CCBs) at the district level and State Cooperative Banks (StCBs) at
the State level.

PACS are outside the purview of the Banking Regulation Act, 1949 and hence not
regulated by the Reserve Bank of India. StCBs/DCCBs are registered under the
provisions of State Cooperative Societies Act of the State concerned and are regulated
by the Reserve Bank of India.

17
Primary Cooperative Banks (PCBs), also referred to as Urban Cooperative Banks
(UCBs), cater to the financial needs of customers in urban and semi-urban areas. UCBs
are primarily registered as cooperative societies under the provisions of either the
State Cooperative Societies Act of the State concerned or the Multi State Cooperative
Societies Act, 2002 if the area of operation of the bank extends beyond the boundaries
of one state. The sector is heterogeneous in character with uneven geographic spread
of the banks. While many of them are unit banks without any branch network, some
of them are large in size and operate in more than one state.

1.1.7.3 Regulatory Control over Rural Cooperative Banks (RCBs)

In India, the cooperative credit business is assigned to credit societies and non-credit
business is assigned to various types of functional societies. The lower tier, namely the
primary credit societies are allowed to undertake both credit and non-credit functions.
The credit business of the higher tier is restricted to credit only and they are licensed
as ‘banks’ and regulated under Banking Regulation Act, 1949 (As Applicable to
Cooperative societies). Thus the functions of a “society” are different from that of
“banks”. However, the banks are handled administratively like that of society because
they are registered as societies but regulated as banks. This duality is the main cause
of weakness of today’s cooperative credit system. This lack of delineation in
administration and regulation has been continuing for long without adequate
resolution.

1.1.7.3.1 Banking Regulation Act, 1949 (AACS) : Though the Banking Regulation Act
came in to force in 1949, the banking laws were made applicable to cooperative
18
societies only in 1966 through an amendment to the Banking Regulation Act, 1949.
Section 56 of the BR Act specifically refers to provisions applicable to cooperative
banks. Since then, there is duality of control over these banks with banking related
functions being regulated by the Reserve Bank and management related functions
regulated by respective State Governments/Central Government. The Reserve Bank
regulated the banking functions of StCBs/DCCBs/UCBs under the provisions of
Sections 22 and 23 of the Banking Regulation Act, 1949 (As Applicable to Cooperative
Societies (AACS). Powers have been delegated to National Bank for Agricultural and
Rural Development (NABARD) under Sec 35 (6) of the Banking Regulation Act (As
Applicable to Cooperative Societies) to conduct inspection of State and Central
Cooperative Banks.

1.1.7.3.2 Banking Regulation (Amendment) Act, 2020 : Banking activity is a

restrictive and licenced activity in India. Section 5(b) of BR Act, 1949 defines
“Banking” as “banking” means the accepting, for the purpose of lending or investment,
of deposits of money from the public, repayable on demand or otherwise and
withdrawal by cheque, draft, order or otherwise”. Since PACS are dealing with their
members for the purpose of deposit and lending, they were not considered under the
purview of BR Act, 1949. However, DCCBs and StCBs are directly accepting deposits
from anybody including public, pressure has always been mounted by RBI to bring
them under their regulatory control in order to make applicable various directions
issued for the safety of public deposits and other inter-bank transactions.

The Central Government on September 28, 2020 has issued the Banking Regulation
(Amendment) Act, 2020 to further amend the Banking Regulation Act, 1949. [Bill No.
39 of 2020]. The amendment was made with the objective to bring the co-operative
banks on par with the developments in the banking sector through better management
and proper regulation of co-operative banks. This would ensure that the affairs of the
co-operative banks are conducted in a manner that protects the interests of the
depositors. It is further proposed to strengthen the co-operative banks by increasing
professionalism, enabling access to capital, improving governance and ensuring sound
banking through the Reserve Bank of India. The Central Government by Notification
dated 29 June 2020 also made provisions of Banking Regulation (Amendment)
Ordinance, 2020 to Primary Urban Cooperative Banks and by Notification dated 23
December 2020 made provisions of Banking Regulation (Amendment) Act, 2020

19
applicable to DCCBs and StCBs with effect from 01 April 2021. Major changes of above
amendments are:

 Fit and Proper Criteria were issued by RBI for Board of Directors and also for
appointment of CEO of Rural Cooperative Banks.
 Supersession of the Board has to be approved by RBI.
 RBI will be empowered for approval of the auditors for Rural Cooperative Banks.
 Appointment of Chairman and CEO and supersession of Board of Directors of
Cooperative Banks is to be done with the approval of RBI. It empowers RBI to
remove the Chairman if he is not fit and proper and appoint a suitable person if the
bank does not do so.
 Regulation of acquisition of shares or voting
 Prohibition of common Director
 Maintenance of assets in India by the banking company
 Procedure for amalgamation/ reconstruction of banking companies
 Procedure for winding up including appointment of liquidator
 RBI, if it feels necessary, can ask the bank to call a meeting of its directors, depute
its officers to this meeting, examine bank’s functioning and can make management
related changes.
 The banks will have to furnish the audit report and returns to RBI/NABARD within
3 months from the end of year instead of 6 months earlier.

In nutshell, Rural Cooperative Banks have been brought more nearer to normal
commercial banks in as far as bank management and operational control is concerned.
Though, powers to command RCBs may remain with the RCS, but RBI’s approvals and
other corrective initiations will carry larger weight now.

1.1.8 Benefits of Effective Bank Management

Banking business is run on commercial lines. Practically, there is no difference

between SBI and a Rural Cooperative Bank in as far as banks’ operational and
functional aspects are concerned except that its Board is constituted and functioning
on a cooperative basis. An effective management of a bank gives following benefits:

20
 Optimum use of resources: Management facilitates optimum utilization of
available human and physical resources, which leads to progress and prosperity of a
bank. Even wastage of all types are eliminated or minimized.
 Competitive strength: Management develops competitive strength to
expand its assets and profits.
 Cordial industrial relations: Management develops cordial industrial
relations, ensures better life and welfare to employees and their morale through
suitable incentives.
 Motivates employees: It motivates employee to take more interest and
incentive in the work assigned and contribute for raising productivity of the enterprise
and profits of the enterprises.
 Stability and prosperity: Efficient management brings success, stability and
prosperity to a business through cooperation and team spirit among employees.
 Expansion of business: Expansion growth and diversification of a business
unit are through efficient management. It creates good corporate image to a business
enterprise.
 Team spirit: Management develops team spirit and raises overall efficiency of
a business enterprise.
 Effective use of Managers: Management ensures effective use of managers
so that the benefits of their experience, skills, maturity, etc. are available to the bank.
 Smooth functioning: Management ensures smooth, orderly and continuous
functioning of bank over a long period. It also raises the efficiency, productivity and
profitability of the bank
 Reduces turnover and absenteeism: It reduces labour turnover and
absenteeism and ensures continuity in the business activities and operations.

1.1.9 Let us Sum-Up

Management is the activity of getting the work done in the most optimum way by
utilizing the available resources. In order to achieve business objectives, there is a
need to bring together available basic resources like men, materials, machine, money
and market. Management is defined as the process by which managers create, direct,
maintain and operate organizations through coordinated cooperative human efforts.
The rural Co-operative Credit structure is pyramidal in nature. Mostly, it has a three-
21
tier structure. All the co-operative institutions follow seven basic principles of
Cooperatives and are managed as per the directions of the Board of Directors. In the
workplace, it is important to have both great leaders and managers. Organizations
need good leaders to lead the organization to achieve its mission and vision. They also
need good managers to ensure that things are getting done and that their teams are
aligned with the company’s goals. Banking in India has become more robust and
provide all kinds of physical and technological services to satisfy the increasing needs
of its customers. Govt. of India has amended Banking Regulation Act, 1949, latest in
the series during September 2020. This amendment has accorded more authorities to
RBI to monitor and ensure competitive and professional functioning by RCBs.

1.1.10 Check Your Progress

1. Management is a process of planning, leading, organizing and _________ people

within a group in order to achieve goals.

a) Controlling b) Paying

c) Counting d) Utilising / Using

2. Management functions consist of a sequence of continuing cycle of three primary

activities: a) Establishment of a plan, b) ________ and c) Measurement of results.

a) Performing the actions b) Allocation of resources

c) Monitoring the work process d) None of the above

3. Which ONE of the following traits corresponds more to Leadership qualities than
Management qualities:

a) Delegation b) Forward planning

c) Vision and Creativity d) Strategic thinking

4. Henry Fayol laid down _____ principles in his book.

a) 12 b) 14

22
 c) 13 d) 15

5. What does one of Fayol’s principles – “Espirit de corps” means?

a) Union is strength b) Service is our motto

c) Buyer beware d) Product is our strength

6. Management is ________________.

a) An art b) A science

c) An art not science d) An art and a science

7. Henry Fayol was a French__________________.

a) Manager b) Actor

c) Writer d) Mining Engineer

8. “General and Industrial Management” was written in year ____ by______.

a) 1916, J. Henri Fayol b) 1916, Harold Koontz

c) 1917, Terry Brainworth d) 1917, C. Louis Allan

9. Which of the following signals signify change in retail banking industry:

a) Higher standards of technological b) Increased Competition amongst Banks

advancements
c) Accelerating customer expectations d) All of the above

10. “Block Chain” relates to:

a) Logistics and warehousing b) Labour Unrest

c) Cryptocurrency d) None of the above

23
11. What is the full form of “UPI”?

a) United Price Index b) Union of Petroleum Industries

c) Unified Price Interface d) Unified Payments Interface

12. Primary Agricultural Cooperative Credit Societies (PACS) are set up by:

a) DCCB of the concern district and RCS b) Primary members of the Society

c) Primary members along with State

d) Village Panchayat and Zila Parishad
Coop. Bank

13. Powers to conduct inspection of State and Central Cooperative Banks have been
delegated to NABARD under which section of BR Act, 1949 (AACS)?

a) Sec 33 (6) b) Sec 34 (6)

c) Sec 35 (6) d) Sec 36 (6)

Answer Key:

1: a 2: b 3: c 4: b 5: a

6: d 7: d 8: a 9: d 10: c

11: d 12: b 13: c

1.1.11 References for Further Reading

Hoggson, N. F. (1926): "Banking through the Ages", New York, Dodd, Mead &
Company

IIBF, Mumbai: "Cooperative Banking" for CAIIB – Publisher: Macmillan Education

Shaktikanta Das, Governor, RBI: March 25, 2021: "Financial Sector in the New
Decade" Address at the Times Network India Economic Conclave in New Delhi

Van Loo, Rory (February 2018). "Making Innovation More Competitive: The Case of
Fintech". UCLA Law Review. 65 (1): 232

Wikipedia: Bank : https://en.wikipedia.org/wiki/Bank

24
Lesson No. 02: HR and Service Rules

1.2.1 Introduction

1.2.2 Managing Human Resources in Rural Cooperative Banks

2.1.2.1 Positioning of Bank Staff in post CBS Period

1.2.1.3 Rules of conduct

1.2.1.4 Staff discipline

1.2.5 Discipline Management

1.2.5.1 Disciplinary Procedure

1.2.5.2 Important provisions of the discipline and appeal regulation

1.2.6 Domestic enquiry

1.2.6.1 Guiding Principles

1.2.6.2 The enquiry procedure

1.2.6.3 Employee’s right to be defended

1.2.7 Let us Sum-Up

1.2.8 Check Your Progress

1.2.9 References for Further Reading

25
1.2.1 Introduction

In present fast changing financial scenario, association between banks’ performance

and the economic growth of any developing economy like India is well established. In
recent years all public and private organisations are adopting innovative strategies for
production and marketing of their services. New pioneering planning processes are
followed to set a direction, providing objectives and goals by better understanding
opportunities and threats that may be on the horizon. However, the biggest barrier is
the inability of many banks and financial entities to change and plans may fail if the
right people are not involved in the process. A probable inference drawn is that
pressures are mounting on the Human Resources available with institutions.

In view of the above, professionalism and business efficiency associated with staff
assumes central importance. Besides working atmosphere, conditions, behavioural
aspects of staff as well as management, procedural aspects, communications,
transparency greatly influence the productivity. Any organization which has a group
of people managing its various functions has set of rules and procedure for conducting
its business. Some organizations call these, their standard operating procedure; others
call it as the code of conduct, all of which make up the internal discipline of the
organization. These rules may be with reference to behaviour and discipline at
workplaces, dealings with the customers or the quality standards.

1.2.2 Managing Human Resources in Rural Cooperative Banks

The management of people in the organization along with handling the financial and
economic risks at the wider level is the most potent challenges in front of the banking
industry in current state of affairs. Efficient and skilled manpower in the sector can
only manage the financial risks that the banks need to take on regular basis. Though
operating as banking institutions, the nature of the organisation and human resource
employed in cooperative banking system is distinctly different from that of commercial
banks. Such differences largely stem from various factors summarised below.

 The overall business milieu of the Cooperative Banks is rural and agrarian.
 The area of operation is geographically limited.
 The people employed are largely from within the State.
 The ownership of the bank is member based who are also customers of the bank.

26
 There is unusual proximity between employees and Board of management.
 The process of recruitment in many cases is not strictly professional.
 The recruitment and promotion policies are generally approved by the Cooperation
Department (Registrar of Cooperative Societies).
 Most staff recruited do not have adequate qualifications and have joined the banks
as sub-staff/clerical grades and then promoted to officer cadre. Now due to change
in the banking scenarios and cope up with the demand, most of the Rural
Cooperative Banks have initiated recruitment of qualified personnel though
professional organization, like IBPS.
 DCCBs do not have the opportunity to recruit staff on an ongoing basis. For long
periods, there was neither recruitment nor promotions at officer level.

It is essential that the capacity building of the available staff is given priority. The
banking industry like the Indian economy is moving very fast and to keep pace with
the changes, the cooperatives will have to provide continuous exposure to their
employees to the best and the latest happenings through participation in training,
seminars and workshops.

1.2.2.1 Positioning of Bank Staff in post CBS Period

With greater global integration, increased application of IT and changing customer

requirements, banking landscape in India has become rich and diverse. The
professionalism and business efficiency associated with staff becomes a top priority
for existence in a competitive world. Varied responsibilities in todays’ work portfolio
can be reckoned as under:

Customer Care and Retail and Commercial Teller Activities and other
Hospitality maintenance Banking Cash Handling

Credit Analyst Project Finance Investment Banking

Corporate Finance Wealth Management Equity Research

MIS and Reporting to HO, Regulatory authorities and

Risk Management
Shareholders

ALM ALCO

27
 Investment SLR and Non SLR investment

The hierarchical structure in most cooperative banks can be broadly divided in to three
categories of staff viz., officers, clerical and sub-staff. The officers’ cadre, other than
CEO of the bank, can be largely divided into three segments viz., junior management,
middle management and senior management. The junior management grade is
largely populated by officers of the lowest two rungs viz., Assistant Manager or Junior
Manager and Manager. While the middle management consists of Senior Manager or
Chief Manager and Assistant General Manager (AGM), the senior management is
represented by Deputy General Manager (DGM) and General Manager (GM). In some
StCBs there is also Chief General Manger (CGM). In clerical cadre, the designations
are Banking Assistant or Junior Accountant. Included in the sub-staff category are
largely peons, watchman, driver, etc.

As banking is becoming more competitive and its regulatory landscape is changing

towards higher order compliance, specialized departments need to be created with
staff having expertise in fund management, investment and treasury operation, ALM
and pricing of products. Similarly, banks that do not have such of those departments
which are essential for complying with the mandatory guidelines of NABARD/ RBI,
such specialized departments need to be formed.

1.2.3 Rules of conduct

The service rules applicable to the staff of DCCBs are similar to the State Government
employees. Each bank has designed service rules of staff and everyone in the bank is
furnished with a copy of the rules governing his/her service to which he/she subscribes
on appointment. The general provisions regarding conduct and discipline that will
apply to all other categories of employees of the bank are set forth as under:

 An employee of the bank may not -

 Borrow money or permit any member of his/her family to borrow money or

otherwise place himself/herself or a member of his/her family under a
pecuniary obligation to a broker or a money lender or a subordinate employee
of the bank or any person, association of persons, firm, company or institution,
whether incorporated or not having dealings with the bank.

28
  Buy or sell stocks, shares or securities of any description without funds to meet
the full cost in the case of a purchase or scrip for delivery in the case of a sale.

 Book debts at a race meeting

 Lend money in his/her private capacity to a constituent of the bank or have

personal dealings with a constituent in the purchase or sale of bills of exchange,
government paper or any other securities.

 Guarantee in his/her private capacity the pecuniary obligations of another

person or agree to indemnify in such capacity another person from loss, except
with the previous permission of the Appropriate Authority.

 Act as an agent for an insurance company otherwise than for or on behalf of the
bank

 Take part in the registration, promotion or management of any bank or other

company which is required to be registered under the new Companies Act, 2013
or any other law for the time being in force or any co -operative society for
commercial purposes without the previous sanction of the Appropriate
Authority, except in the discharge of his/her official duties.

 Engage directly or indirectly in any trade or business or undertake any other

activity without previous sanction of appropriate authority.

 An employee may, without such sanction, undertake honorary work of a social or

charitable nature or occasional work of a literary, artistic, scientific, professional,
cultural, educational, religious or social character, subject to the condition that
his/her official duties do not thereby suffer or the undertaking or such work is not
detrimental to the interest of the bank; but he/she shall not undertake, or shall
discontinue such work if so directed by the Appropriate Authority.

 Nothing will prohibit an employee from making bona fide investments of his/her
owned funds in such securities as he/she may wish to buy. However:

 Canvassing by an employee in support of the business of an insurance agency,

commission agency, etc. owned or managed by a member of his/her family shall
be deemed to be a breach of this sub-rule.

 Prior sanction under this rule is not necessary for holding an office ex-officio
outside the Bank, under any law or rules, regulations or bye-laws made there
29
 under, for the time being in force, or under directions from any authority to
whom the employee is subordinate. An employee guilty of infringing any of the
provisions as laid above may render himself liable to dismissal from the service.

 An employee of the bank may not take an active part in politics or in any political
demonstration. An employee may not accept office on a municipal council or other
public body without the prior sanction of the bank.

 All employees must maintain the strictest secrecy regarding the Bank’s affairs and
the affairs of its constituents.

 No employee shall accept or permit any member of his/her family or any person
acting on his/her behalf to accept any gift except customary gifts from relatives and
personal friends on occasions such as marriages, anniversaries, funerals or
religious functions when the making of gifts is in conformity with the prevailing
religious or social practice as per following guidelines:

 As a normal practice, an employee shall not accept any gift from a person
obligated to the Bank through official dealings.

 A casual meal, lift or other social hospitality shall not be deemed as a gift.

 An employee may not overdraw his/her account with the Bank, whether against
security or otherwise, without the authority of the controlling office or the
branch manager to the extent of powers delegated to him/her.

 No employee shall bring or attempt to bring any political or other outside

influence including that of individual directors of the Bank or the Members of
the Local Board to bear upon any superior authority to further for own interest
in the bank.

 An employee desirous of applying for an appointment elsewhere or for a post in

a higher capacity in the bank itself (if permissible) shall forward his/her
application through the branch manager or the head of the department as the
case may be.

 In terms of the Criminal Law (Amendment) Act, 1988, the definition of the term
“public Servant” as given in Section 21 of the Indian Penal Code has been
extended to cover the employees of statutory corporations. Accordingly, all

30
 employees of the bank come within the purview of the Prevention of Corruption
Act and any other criminal law relating to public servants.

Bank codifies the behaviour or conduct expected from its employees. Breach of any
norms of conduct is treated as misconduct.

1.2.4 Staff discipline

An organization requires a framework of policies, rules regulations and procedures to

fulfil its roles. These are necessary to function in an orderly and smooth manner. The
orderly conduct based on well-defined standards and clear guidelines is called
discipline. The word “discipline” is probably derived from the word “disciple”, which
means learner or follower. When a person spontaneously and willingly abides by the
required norms, it is called positive or constructive discipline; whereas when he is
compelled to behave in a desired way under threat or fear of punishment, it is termed
as negative or punitive discipline. Although positive discipline is desirable, there will
be occasions when punitive action has to be resorted to for three main reasons:

 To make the employee realize the seriousness of infringing the rules of conduct

 To send right messages to others, and

 To prevent recurrence of such events within the organization.

The following are the assumptions in employee discipline:

 Disciplined behaviour is essentially a voluntary concept. The acceptance of

norms and rules should be out of conviction and not on account of compulsion.
This presupposes that the rules and regulations should be properly
communicated and understood by the employees.

 Norms to be accepted should be described precisely and rules updated from

time to time to ensure that they are in conformity with the changing scenario.

 The authority issuing instruction of good behaviour on his/her part must set an
example to his/her subordinates.

 The employees should be praised in public and reprimanded in private.

Discipline is often compared with a hot stove. The application of hot stove theory in
the matters of discipline implies;

31
  Total impartiality while handling disciplinary matters

 No undue time-lag action and effect

 The consequences should be logical and the punishment for the misbehaviour
should be made known

 There should be consistency in managerial follow-up action, i.e. the outcome

should not be at a large variance

What emerges from the above is that for effective discipline at the workplace, it is
imperative to have fair play, proper and crisp communication of the rules and
regulations and impartial treatment of the cases of indiscipline. Discipline that
restricts the freedom of an employee connotes negative feelings as failure to comply
and invites penalties. Discipline should instead involve creation of mind set and
attitudes to follow the desired pattern of behaviour. When more and more employees
follow the rules, an ideal organizational climate is created where employees willingly
conform to a standard behaviour. The seniors play an important role in creation and
maintenance of such a climate by setting an example by themselves. Positive discipline
leads to team spirit, co-operation, mutual respect, high employees’ morale and a
positive environment.

On the other hand, negative discipline refers to people being forced to follow rules and
regulations threatening them severe punishment, if they fail to follow the standards.
Such punitive discipline where adherence is sought to be ensured through penal
actions ensure only minimum adherence to the rules and regulations, that too, out of
fear of being punished. It is always advisable to strive for positive discipline as it results
in many other benefits and fosters an atmosphere of mutual trust and openness. The
staff members have rights to appeal against the decision of bank and proper decision
is taken by the competent authorities.

1.2.5 Discipline Management

Discipline management involves creating an environment where employees

voluntarily obey rules and regulations. It means and includes handling cases of
indiscipline or misconduct. There are various approaches to discipline management,
where it is necessary to identify the causes of indiscipline, analyse the reasons try to
convince employees-through counselling-that they need to follow rules and as a last
32
resort, go in for punitive action. Trying to maintain discipline only through punitive
measures would mean negative discipline which is not in the ultimate interest of the
organization. Following are few steps, which should enable the organization to ensure
promotion of positive discipline:

 The code of conduct, rules and regulations should be laid down clearly, with the
consequences to the organization-in terms of losses and bad reputation which may
result from not following the norms, should also be clearly communicated to the
workers. The consequences the worker would face by not following the rules should
be clearly spelt out.

 Conscious efforts should be made to see that the rules have easy acceptability. The
norms and standards should be also decided that they are easy to adhere to. Setting
impossible standards is bound to lead to deviation.

 Once the rules are framed, the adherence thereof must be insisted upon. Mere
laying down of rules and regulations and laxity in its implementation would not
create an atmosphere of positive discipline. It is an admitted fact that the rules and
regulations restrict freedom of the employees once they notice that the
management is not keen in implementing the rules, they will not be inclined to
voluntarily follow the regulations.

 The laid down rules need to be modified periodically to ensure that outdated rules
are removed from the rules book.

1.2.5.1 Disciplinary procedure

The standing orders prescribe the rules of an establishment in respect of disciplinary

procedure. The disciplinary proceedings begin with the initial investigation in the
reported misconduct. After the preliminary investigation, the appropriate authority
decides to proceed further with disciplinary action. The more important points of the
procedure are summarized below.

1.2.5.2 Important provisions of the discipline and appeal regulation

The important provisions of the discipline and appeal regulation are:

Where it is proposed to hold an enquiry, the disciplinary authority shall frame definite
33
and distinct charges on the basis of allegations and the articles of charge together with
a statement of allegations shall be communicated to the officer.

 The officer is asked to submit his/her written statement of defence to the articles
of charge and statement of allegations within a stipulated period.

 If the statement of defence is not received or it is not found to be acceptable, the

disciplinary authority may itself hold an enquiry or appoint an Inquiring Authority
to conduct enquiry.

 The disciplinary authority may appoint a Presenting Officer to present on its behalf
the case in support of the articles of charge while the officer may take the assistance
of any other officer-employee.

 The disciplinary authority shall take action on the enquiry report and impose
penalty.

 The provisions relating to suspension of the officer-employee and payment of

his/her subsistence allowance are also covered by the regulation.

 An officer-employee may appeal against an order imposing penalty an order of

suspension to the appellate authority.

 The reviewing authority can call for records within 6 months and review the
penalty.

1.2.6 Domestic enquiry

The principles of natural justice apply to the conduct of domestic enquiry. There is,
however, a slight difference in the procedure for conducting enquiry for junior staff
and that of the officer employees. Before commencing the enquiry, the enquiry officers
are expected to go through the procedure carefully.

1.2.6.1 Guiding Principles

 Departmental enquiry is not a mere formality, but is a serious procedure and

should, therefore, be conducted with due seriousness.

34
 Domestic enquiry is a quasi-judicial proceeding. Although the provisions of the
Evidence Act, 1872 do not apply, substantive principles of the Act should be kept
in view.

 The scope of the enquiry is determined by the charge-sheet or articles of charge. It

lays down the terms of reference for the enquiry officer. He/she should not go
beyond the terms of charge-sheet.

 The employee proceeded against should be clearly informed of the charges leveled
against him/her.

 The entire proceedings should demonstrate a fair play on the part of the enquiry
officer. If he/she is doubtful in a complex matter of what decision or ruling should
be given, he/she will do well to err in favour of the charge-sheeted employee.

1.2.6.2 The enquiry procedure

As enquiry is a quasi-judicial proceeding and is required to be conducted with due

diligence, the important points in the procedure are indicated below:

Notice of enquiry: The time, place and date of the enquiry should be clearly stated
in the notice. Reasonable period should be given to the employee to prepare for the
enquiry. If the employee does not attend the proceedings, it is advisable that the
enquiry is adjourned and a fresh date fixed and the employee is notified. Proof of
delivery of notice should be obtained and held on record. Notice may, therefore, be
sent by registered post.

Venue: The place of the enquiry should generally be the unit where the employee is
posted. It does not, however, mean that the enquiry should be held at the very place
where the misconduct took place. The enquiry could be held elsewhere so long it does
not inconvenience the charge sheeted employee (CSE).

Evidence: Although the provisions of the Evidence Act are not applicable, it is
advisable to observe a certain procedure similar to that followed in a court. Any
statement made in support of charges must be made in the presence of the charge-
sheeted employee so that he/she has an opportunity to question such a statement. The
documentary evidence in support of the case must be taken on record only after giving
the CSE a chance to inspect the documents.

Witness: A witness is a person who appears in the enquiry either in support of the
35
charges or in support of the CSE. The statements made by the witness are considered
as oral evidence. The witness should be examined first by the party producing
him/her; this is known as examination –in- chief. Thereafter the opposite side can
cross-examine the witness. The enquiry officer should carefully observe the
demeanour of the witness so as to arrive at the credibility of his/her statements.

Persons who can be present at the enquiry: Departmental enquiry is a closed

door proceedings and not one where anyone can attend. Only those connected with
the proceedings can attend the enquiry. They are: (a) the enquiry officer, (b) the
management representative (MR), (c) the CSE. (d) The defence representative (DR),
(e) the witness whose evidence is being recorded (f) and a typist or a stenographer who
records the minutes of the proceedings. The witnesses are allowed to depose in the
enquiry one after the other and, therefore, no two witnesses should be present in the
enquiry at a time.

The proceedings: At the first hearing, the enquiry officer should enquire from the
CSE whether he/she has received the charge-sheet and has understood the contents
thereof. Then, in the presence of' his/her representative, he/she should put a question
to him/her as to whether he/she pleads guilty to the charges. If he/she pleads guilty,
he/she should be asked whether he/she has understood the consequences of his/her
pleading guilty and whether he/she is doing so at his/her volition. Answers to these
questions should be recorded, preferably, verbatim. If the CSE does not plead guilty to
any or all the charges, the enquiry officer should ask the management representative
to lead the case in support of charges. The MR may lead his/her case through witnesses
who should be permitted to depose one after the other. After the examination -in-chief
of the witness, the CSE should be given chance to cross examine him/her. Only, after
the cross-examination is over the next witness should be called. The documents taken
on record should be given to the defence for inspection and thereafter taken on record.
When the MR closes his/her case the defence should be asked to present its case
repeating the same procedure. After both the sides have led their evidences and have
also summed up their respective arguments, the CSE should be asked whether he/she
has anything else to say or submit. Thereafter, the enquiry proceedings are closed.

1.2.6.3 Employee’s right to be defended

The Model Standing Orders as also the Discipline and Appeal rules of an organization
provide for right of a delinquent employee to be defended at the domestic enquiry by
36
his/her union representative or in exceptional cases by a lawyer. The Enquiry Officer,
therefore, has to ensure that the defence representative of employee is no one other
than a representative of a registered union, or with the permission of the Disciplinary
Authority, a lawyer. The defence representative need not necessarily be a
representative of the recognized union. If the employee wishes to engage a lawyer, the
matter should be referred to the Disciplinary Authority and further proceedings
should be recorded as per procedure.

Where the delinquent employee does not have a defence representative and would still
like himself/herself and his/her witness examined, the Enquiry Officer should
formulate the questions in the Examination- in-Chief and re-examination on behalf of
the employee, the cross examination being conducted by the Presenting officer.

Defence Representative and his/her role in an enquiry: The charge sheeted

employee has a right to have him/her defended by a representative of a registered
trade union of Bank Employees. He/she can also be represented by a Lawyer with the
prior approval of the Disciplinary Authority. The Enquiry Officer should note that
he/she has no powers to permit the delinquent employee to be represented by a
Lawyer. If a request therefore is received, it should be referred to the Disciplinary
Authority for his/her approval. It should also be noted that there can be only one
representative for each employee. The role of the Defence Representative is to disprove
the charges levelled in the charge sheet against the delinquent employee. To this end,
he/she will also produce documents and witnesses well in advance and cross-examines
prosecution witnesses. He/she will also submit a brief to the Enquiry Officer, after
going through the prosecution brief.

1.2.7 Let us Sum-Up

Any organization, which has a group of people managing its various functions, has a
set of rules and procedures for conducting its business. Managing Human Resources
in a DCCB is one of the greatest challenges for its management due to its peculiarities
as compared to the Commercial Banks. The role and responsibilities of staff are
different due to nature of work assigned to them. Each and every employee in the bank
is furnished with a copy of the rules governing his/her service to which he/she
subscribes on appointment. Discipline management involves creating an environment
where employees voluntarily obey rules and regulations. The principles of natural
justice apply to the conduct of domestic enquiry. Enquiry is a quasi-judicial proceeding
37
and is required to be conducted with due diligence.

1.2.8 Check Your Progress

1. Which of the following is the most important objective of HR management?

a) Minimize the role of human by replacing them with machines.

b) Teach humans how to deal with stress in workplace.

c) Ensure people have the requisite judgment skills before hiring them.

d) Proper utilization of available skilled workforce.

2. HRM acronym stands for?

a) Human Relations Management b) Humanistic Resource Management

c) Human Resource Management d) Human Resourceful Management

3. HRM is a ________.

a) A staff function b) A line function

c) A staff function, line function and d) All of the above

accounting function

4. Finding ways to reduce _____ is a key responsibility of management.

a) Dissatisfaction b) Uncertainty

c) Stress d) None of the above

5. Strategic thinking is a ________ process.

a) Short term b) Long term

c) Continuous d) All of the above

38
6. Imposing discipline in the form of rules & regulations is an inalienable right of:

a) Management b) Employee

c) Trade Union d) None of the above

7. Which of the following is an objective of employee discipline?

a) goal accomplishment b) changing employee behaviour

c) promoting industrial relations d) All of the above

8. Getting the willing cooperation of the employees in voluntarily observing the

discipline code of an organization is the essence of ______.

a) negative discipline b) positive discipline

c) progressive discipline d) None of the above

9. The threat of punishment as a key to imposing discipline is the basis of ____.

a) negative discipline b) positive discipline

c) progressive discipline d) None of the above

10. Which of the following is not a disciplinary action against employees?

a) dismissal b) increments

c) discharge d) disciplinary demotion

11. Which of the following statements indicates a good disciplinary system?

a) An employee must be reprimanded in public.

b) An employee must not be reprimanded at all.

39
 c) An employee must be reprimanded in private.

d) None of the above

Answer Key:

1: d 2: c 3: a 4: b 5: c

6: a 7: d 8: b 9: a 10: b

11: b

1.2.9 References for Further Reading

Julie Abraham and Jonathan Dr. Mayuri (October 2018) : Challenges Faced by
Human Resource Management in Cooperative societies", Journal of Emerging
Technologies and Innovative Research (JETIR), Volume 5, Issue 10, Pg 241-247

NABARD (2009): Report of the Committee for "Human Resource Policy for StCBs
and DCCBs", Chairman: Sh. S.K. Mitra

NABARD (2016): Report of the Committee for "Assessment of Human Resources of

CCS in the Post CBS Environment", Chairman: Sh. Amalorpavanathan

Rajesh (May 2019): "Role of HRD in cooperative banks", International Journal of

Basic and Applied Research: Volume 9 Number 5, Pg 103-108

Thyagaraja Dr. C.M. & Maganur Ms. Goutami (January 2021): "Human Resource
Development in Cooperative Banks - A Contemporary Scenario", International
Journal for Creative Research Thoughts, Volume 9, Issue 1, Pg 1256-1262

40
Lesson No. 03: House Keeping

1.3.1 House Keeping - Introduction

1.3.2 Need and Components of Proper House Keeping

1.3.2.1 Inter-office Transactions

1.3.2.2 Sundry and Suspense Accounts

1.3.2.2 Internal Checks and Controls

1.3.3 Cash Management

1.3.4 Preservation of Records

1.3.5 Training of Staff

1.3.6 Customer Service

1.3.7 Let us Sum-Up

1.3.8 Check Your Progress

1.3.9 References for Further Reading

41
1.3.1 House Keeping – Introduction

Plain meaning of Housekeeping is "to set a place in order" or “to keep things in proper
place” or “neat and clean” – with no unnecessary thing that is not required should be
visible. These ‘things’ could be infrastructure, dead stock, data pertaining to clients,
physical document files, etc. Bank branch is a business unit or place which caters all
specified services to its clients, i.e., public. In other words, it is expected that if public
visits the place, their job is attended to swiftly and to the satisfaction. Branch Manager
is the Head of the unit and, therefore, is responsible for all the affairs of the branch.
He/she has to work with a team and as a team leader his/her strategies should be to
take all of the team members along in achieving the targets of business as well as
improving the image of the Bank. Personal capabilities and initiatives of the branch
manager can lead the branch to a successful height. Instead of centralizing all the work
in his/her own hands, he/she should delegate the functions of the branch to the staff
members and keep himself/herself well informed about the happenings at the branch.
The activities at the branch may be categorized broadly as follows:

1.3.2 Need and Components of Proper House Keeping

House Keeping in any banking institution is the key to effective working. At each unit
of the Bank, the books of accounts need to be written up on a daily basis and reconciled
periodically to ensure that there is minimum scope for any irregularities and frauds.
The cash book should be closed at the end of each day and the cash balance as per the
cash book reconciled with cash on hand. All other ledgers need to be reconciled
periodically, preferably every fortnight. With the computerization in banks, these
tasks have been greatly simplified and automated. Branch Manager should attend the
following aspects on regular basis.

1.3.2.1 Inter-office transactions

Most transactions between the various units in the RCBs take place through inter-
branch / office entries. These need to be regularly set-off as they are one of the most
potent areas for frauds and irregularities. Originating and responding to inter-office
transactions need to be authorized by a senior officer, and documents supporting the
transaction should be maintained at end of each day. At the head office level, all inter

42
office transactions should be monitored as early to their occurrence and unreconciled
entries tracked regularly. By the end of the accounting year or monitored period,
efforts should be made to have no unreconciled entries in the books.

1.3.2.2 Sundry and Suspense account

Another major area to be monitored and managed very carefully is the sundry and
suspense account. This is a temporary head of account where debits and credits are
made when the transaction has yet not been concluded. For example, an advance
provided to an officer for undertaking an official tour. In such cases, it is expected that
the bills are submitted and settled within reasonable time after the officer’s return.
Often, many such entries remain unresolved and get carried into the balance sheet as
an item of asset. At the beginning of the next accounting year, the aggregate amount
gets reflected as an opening balance, and unless closely monitored, it may become loss
assets of the bank. A periodic review of individual Sundry / Suspense balances at every
accounting unit is a must.

1.3.2.3 Internal Checks and Controls

The internal checks and controls is an integral part of the management of any business
organization. The methods of operations adopted have to be guided by standardized
procedures and practices so that there is uniformity across different branches/offices
of the organization. Such checks and controls are necessary to prevent irregularities
of omission and commission during the course of daily business. The internal checks
and controls presuppose the occurrences of human error as a natural phenomenon
and try to obviate them. It also prevents and dissuades employees and clients from
willful perpetration of frauds and malpractices. Sound checks and controls are
critically important for the banking system as not only do they deal in money, but are
the repositories of public savings held in trust. The goodwill and public confidence are
crucial elements for the survival and growth of banks. The internal checks and
controls play a vital role in maintaining the reputation of banks and are key to a strong
financial sector in the economy. A loss of public confidence in banking system can
severely retard growth.

43
a) Objectives of Internal Control System are to ensure that:-

 Business of the bank is conducted in a prudent and orderly manner in accordance

with the pre-laid out, established policies.

 All transactions in the bank are conducted only under specific or general authority
given to specific staff.

 All assets of the banks are properly and adequately safeguarded and all liabilities
are controlled.

 Accounting norms and uniformity in practices are followed.

 All records are systematically maintained to provide complete, accurate and timely
information.

 Risks associated with the business are identified, assessed, monitored and
mitigated.

 Compliance with appropriate laws and regulations.

b) Elements of Internal Control in a District Central Cooperative Banks are:

 Ensure a proper financial accounting system is established and accounting

principles & standards are strictly adhered to.

 Ensure books of accounts are continuously updated, there are no arrears in

balancing of books and transactions across all accounting-units are properly
reconciled.

 Carry out inspection of money, stocks, other assets and documents in the custody
of the bank.

 Undertake scrutiny of loans and advances, investments and related transactions to

ensure compliance with approved policies, procedures, legal and regulatory
requirements. Report on how conflict of interests were managed.

 Ensure timely and effective compliance and follow up of corrective action on its
report by operating units.

 Provide timely reports to the audit committee /Board on its significant

observations and also alert the audit committee / Board regarding suspected

44
 fraudulent activities and significant instances of non‐compliance with policies and
procedures by operating units.

 Maintain confidentiality of the information it comes across in the execution of its

functions.

c) Process of Internal Control Systems - The Bank periodically reviews the

internal control areas through analytical reports covering the following areas:

 Adjustment of inter-branch accounts

 Reconciliation of inter-bank accounts

 Reconciliation of NEFT/RTGS/ATM accounts and

 Status of balancing of books of accounts

 Reconciliation of clearing differences

The banks were given definite time frame to improve their internal systems and the
progress critically reviewed/scrutinized during the course of NABARD statutory
inspections.

d) Adjustment of inter-branch accounts:

The RBI has prescribed for close monitoring and periodical review of old unreconciled
entries in inter-branch accounts of banks, which is a fraud prone area. The continued
pressure on banks has been yielding the desired results inasmuch as the unadjusted
entries have been substantially reduced over a period of time.

To promote effective concern in reconciliation of debit entries in inter-branch

accounts, a concept of making provision for net debits outstanding for more than six
months in inter–branch accounts has been introduced from period ending 03/ 2004.

Banks are required to ensure that the practice of forced matching of inter-branch
entries should be subject to appropriate checks and balances. Any forced matching
practice adopted by banks for adjustment of old unreconciled entries in inter-branch
accounts should have the approval of their Audit Committee of the Board and the
Board of Directors should be apprised of the full details of such practice. The statutory
auditors of the bank should also look into the justifiability from the angle of fair
accounting practice.

45
e) Balancing of books

A related concern that required a close monitoring was the progress in reducing the
arrears in balancing of books at branches of banks. A reporting system for banks was
introduced in July 1995 for monitoring progress in respect of banks having more than
5% of branches having arrears in balancing of books. A detailed report on banks which
had arrears in balancing of books at branches accounting for more than 40% of
business are reviewed at periodical intervals.

The Cooperative banks should ensure that all the books/ledgers/subsidiary ledgers are
balanced periodically by the bank’s branches and ensure that there are no differences
at the year-end position. The banks may also take help of CBS software, if it
provides/generate book balancing reports.

f) Strengthening of internal audit /control system

Banks were advised to reconstitute the Audit Committee of the Board (ACB) with a
view to making them more independent and with larger representation of non-
executive directors. The ACBs are to be invariably headed by a Director other than
Chairman. The bank should also have a chartered accountant (if not elected may be
co-opted) in the ACB besides other directors of the bank. The minutes of ACB are to
be placed before the Board of Directors on an ongoing basis to serve as a link between
their functioning.

All Cooperative banks were advised by NABARD to appoint a senior officer of the bank
as Compliance Officer who should act as a nodal agency to ensure compliance of
internal management controls as well as regulatory and for guidance role.

g) Audit system in banks

i) NABARD has evolved systems and norms of empanelment and appointment and
remuneration of statutory auditors in RCBs and payments for audit and provided
guidance on accountability aspects under statutory audit of banks, quality and
coverage of statutory audit reports, system of concurrent audit and its coverage.

ii) NABARD has circulated revised guidelines in May 2013 to Cooperative Banks on
revised audit scales (based on CAMELSC approach) for implementation by banks. The
banks should share the same with Statutory Auditors for rating the banks as per
revised guidelines.

46
iii) Further, the banks were advised to review the present system of concurrent audit
immediately and incorporate necessary changes therein based on the guidelines of
NABARD. The banks are also to review once a year the effectiveness of the system and
take necessary measures to correct the lacunae in implementation.

iv) NABARD had advised all cooperative banks to get Migration Audit done
consequent upon shifting to CBS. It was observed that many banks had not conducted
the same timely and mega differences were also observed in banks which conducted
the same.

v) NABARD had advised all cooperative banks to formulate a Board approved IS Audit
Policy and get the IS Audit done through a CISA (Certified Information Systems
Auditor) auditor. These CISA certified auditors have enhanced critical skills and
expertise in the guidelines, standards acquisition, development, testing, and
implementation of information systems (IS). Their duty is monitor, manage and
protect organization's IT and business systems based on risk management strategies.
The Report on observations/lacunae pointed out in IS audit should be put up to the
Audit Committee/Board of the bank for giving directions for rectification/corrective
measures. It was observed that many banks had not conducted such audit timely which
should be done at the earliest.

h) Fraud monitoring

The system of internal control and follow-up in respect of cases of large frauds of Rs.
20.00 lakh and above were directly required to be reported to the NABARD at
ENSURE platform which is reviewed periodically by NABARD.

The Banks are cautioned about the details of individuals/companies/firms/

proprietary concerns involved in perpetration of frauds, furnishing details of their
directors/partners /guarantors/associates. In addition, modus operandi of new types
of frauds is also circulated among banks and financial institutions, to put them on
guard. NABARD also conducts special scrutiny in respect of large value frauds
involving Rs. 1.00 crore and above at the branch/controlling office level during the
course of Statutory Inspections to find out lapses contributing to the frauds.

All cases of frauds involving large amounts are analysed to identify the contributory
factors and taken up with the banks concerned for remedial measures. The aspects
relating to recovery, staff accountability and improvement in internal controls are also
47
pursued with the banks which are advised in the process to report the fraud cases to
Police/CBI, if not already done. Detailed instructions have been issued by NABARD
towards streamlining fraud prevention and control/monitoring system.

NABARD has issued revised guidelines on fraud monitoring including a sub-

committee of Board for reviewing the frauds of Rs. 1.00 crore and above. Banks were
also circulated common types of frauds by giving the modus operandi thereof and
recommended several measures for early detection and prevention of frauds including
recommendations for improvement in internal control, house-keeping, vigilance,
management, etc.

The banks have been advised to report all cases of frauds at NABARD’s ENSURE portal
through FMS I to III returns. Further, banks also advised to report directly fraud cases
involving an amount of Rs. 20.00 lakh and above to Central Fraud Monitoring Cell
(CFMC) at HO of NABARD for reviewing/follow-up of the same.

The State Governments/RCS have also been advised by NABARD to put in place a
policy framework for large value frauds as per CVC guidelines.

Further with the rising incidence of frauds in the Rural Cooperative Banks, it was felt
necessary by the NABARD that banks have to take proper steps to improve the control
system to prevent the occurrence of frauds. To strengthen the assessment system,
NABARD issued a guidelines to Rural Cooperative Banks and suggested to adopt
Fraud Vulnerability Index. This index is self- assessment tools and gradation system
which bank will come to know the likelihood of frauds happening in the bank.

i) Accounts Control

Proper maintenance of accounts, upkeep of appropriate ledgers, supporting subsidiary

ledgers and other registers are important in the context of accounts control. The bank
follows standard practices of accounts and the basic books in uniform formats are
maintained by all offices/branches of the bank. The internal and ongoing control
mechanism include daily posting of the ledgers, verification of entries by offices from
the vouchers. The officers who verify the entries and the clerks who make primary
entries are specifically allotted such work and are personally responsible. The books
are periodically balanced which ascertains the accuracy of maintenance of books. The
balancing is carried out at specific periodic intervals and a subsidiary balancing ledger
is maintained. The books of the bank are certified as tallied and the balances in the
48
subsidiary balancing ledger tallies with the balances in the General Ledger.

j) Administrative control

Various administrative measures are followed to ensure the soundness of internal

checks and controls. These include rotation of the staff engaged in sensitive accounting
and cash handling activities, periodic transfer of staff etc. These controls also include
delegation of financial powers in respect of sanction of advances, post sanction
monitoring, surprise visits to branches by CEO senior officers, etc.

It is advisable that Cooperative Banks adopt a Board approved staff rotation policy
specifying the criteria for such rotation for each class of its officers/employees and the
same should be adhered to by the bank.

k) Internal audit/inspection

Audit is carried out periodically by the internal auditors of the banks. The audit on the
one hand helps to ensure that the accounts are correctly reflected in the books, and on
the other, it also gives valuable feedback to the management about systemic lacunae
and risk areas. The internal audit essentially ensures that the books are properly
maintained and that the annual accounts reflect the true and honest financial position
of the bank. Audit deals with financial transactions of the organization. Concurrent
audit of large branches is also in process at DCCBs which takes care of the correctness
of daily transactions on continuing basis.

The banks also carry out internal inspections. The inspections are broader in its
coverage and content than audit. Typically the internal inspection of a DCCB includes
review of loan decisions, documentation, use of delegated powers, adherence to
internal checks and controls, and branch management aspects. It also critically
reviews the books of accounts and other housekeeping aspects. Inspection, in fact, can
be stated to be a qualitative review of the affairs of the organization.

l) Vigilance Cell in Banks:

During early 90’s, RBI has set up a Ghosh Committee to enquire into the various
aspects of frauds/irregularities which stressed the imperative need for exercising
effective control over operating units to minimize the incidence of frauds and
irregularities. Functions of Vigilance are:

49
 Preventive Vigilance - Preventive Vigilance relates to the systems and strategy
which an organization puts in use or should formulate to eliminate or minimize the
potential for irregularities taking place.
 Surveillance - The administrative offices have to ensure that timely submission
of control returns take place and scrutiny thereof is taken care of.
 Detective Vigilance - Detective Vigilance implies an intelligent check of bank’s
books and records in depth. This can be achieved by the regular inspection of the
branches through the inspectors.
 Punitive Vigilance - This is an important aspect of vigilance which has its own
merit and demerit and is so necessary for growth of any organization on healthy
lines. Though the books have their own systems and procedures for achieving the
objectives of Punitive Vigilance by conducting disciplinary enquiries.

Frauds often occur in banks due to criminal deception of persons singly or in collusion
with others. Unfortunately, there is a rising trend of misappropriations,
embezzlements, defalcations etc. in the Central Cooperative Banks. Such frauds in
banks are perpetrated through encashment of forged documents, manipulation of
accounts or operations of fictitious accounts. Unauthorized credit facilities granted for
reward or illegal gratifications, facilities provided to close relatives without proper
appraisal, complicity in manipulation of records and documents while granting excess
loan, etc. are also types of frauds prevailing.

These frauds have multiplicity of negative effects in banks. The first and most
important is the injustice to the depositors. It is a criminal breach of trust towards
them and results in the loss of goodwill among the present and potential clients. In
rare cases, frauds of large intensity or very frequent in occurrence can result in a run
on the banks. The second fallout is the weakening of the moral and ethical value system
in the bank. Frauds occur mostly due to laxity in internal checks and controls. It is
often seen that the internal staff come to know of frauds much before auditors and
management become aware of these. The pecuniary gains resulting from frauds may
draw more persons to commit such acts. The third impact on the bank is the actual
physical loss of money. This will impact the profitability of branches/banks as
provisions may have to be made. It is the primary responsibility of the management to
prevent frauds.

The management counters the situation essentially in two ways. The first by preventive
50
vigilance which includes the review of existing systems, periodically ascertaining that
laid down procedures are followed, staff is rotated as desired, officers use delegated
powers appropriately, examine that security items, records etc. are properly
maintained. Insistence on regular reporting by branches to Head Office; identification
of any exceptions to normal trends in the business of branches, analytical review of
such trends etc. are carried out. The management also insists that fraud prone areas
are identified by internal auditors and special efforts are taken to tighten checks and
controls in such areas.

Usually, the District Cooperative Banks insist upon the Branch Managers to issue a
monthly certificate to the head office. The branch manager certifies that the cash
balances are correct, books are balanced, important accounts are checked by specific
officers and returns are verified and submitted to higher authorities on time. Such
certification makes the branch managers and other verifying/authenticating officers
personally accountable for the proper compliance with laid down systems, procedures,
checks and counter checks. Surprise checks are also conducted in branches as a
measure of preventive vigilance.

The second approach is to initiate investigations/enquiry against all cases of fraud.

Both the internal enquiries as well as criminal investigation by the police are preferred.
It is important to note that the investigations must be conducted diligently so that
deterrent punishment is meted out to the perpetrators. In certain cases, the bank
management shows reluctance to prefer police complaints fearing the loss of
confidence of the general public. But this is neither the right practice nor the right
rationale. Frauds can have outsiders involved in it. It may be committed due to
extortion, outside pressure, external criminal nexus or with the help of powerful
elements within the bank. Such ramifications shall be exposed to only outside, neutral
agencies. It is, therefore, insisted that frauds are reported to NABARD at Ensure
platform through prescribed FMS Returns and such cases are immediately registered
with the police. The modus operandi of frauds should be detected by detailed scrutiny
so as to understand the weaknesses in the existing systems and also introducing newer
checks and controls as well as modifying the method and periodicity of checking and
reporting as the case may be.

51
m) Cyber security

Use of Information Technology by banks has gone up rapidly after implementation of

Core Banking Solution and now it has become integral part of operational strategy of
banks. Keeping in view the need of the customers, all business operations are being
made in the digital platform. Thus it is more important banks are required to adopt
robust cyber/ resilience security to avoid the incidence of frauds, data breach and
denial of services.

n) Review by Board of Directors

The management reports the status of the compliance with internal checks and
controls in head office departments and branches to the Board. The delays in reporting
by branches, improper monthly certifications, deviations between certification and
actual verifications etc. are reported. Reports on any frauds detected and progress in
ongoing enquiries are also reported. The board is apprised of the status of
housekeeping and accounts. The board generally appoints an audit committee which
goes into the details of such reports, calls for clarifications etc. The reports of internal
audit and inspections are also reviewed by the board.

1.3.3 Cash Management

The cash management in bank branches is important not only from security aspect but
also from the fact that excess cash results into loss to the branch and bank because the
branch does not earn any income on this. The following precautions need to be taken
while handling cash or cash transactions:

 Cash balances should be kept in joint custody.

 While opening strong room or safe for taking out of deposit of cash, the main door
of the branch should be closed.

 Duplicate keys of cash safe, strong room and all other important keys are to be kept
in a sealed box under safe custody with nearest branch or another bank.

 Suitable alarm device to be installed in the strong room/cashier/Manager’s cabin

for use in case of emergency.

 Reporting of Forged/Counterfeit currency notes to HO.

52
 Cash to deposit ratio to be fixed prudently

 Periodical exchange of soil and mutilated currency notes

1.3.4 Preservation of Records

Each bank prescribes a certain period for preserving their different records as per
guidelines of Govt. of India/ RBI. Daily transaction vouchers, registers and computer
print-outs should be kept at a safe place. Periodical pest control in the record room
should be got done without fail.

DCCBs should introduce a system of maintaining proper record of transactions

prescribed under Rule 3 of PML Rules, 2005, as mentioned below:

 All cash transactions of the value of more than ` 10 lakh

 All series of cash transactions integrally connected to each other which have been

valued below ` 10 lakh where such series of transactions have taken place within a

month and the aggregate value of such transactions exceeds ` 10 lakh;

 All transactions involving receipts by non-profit organisations of value more than

` 10 lakh

 All cash transactions, where forged or counterfeit currency notes or bank notes
have been used as genuine and where any forgery of a valuable security or a
document has taken place facilitating the transaction, and

 All suspicious transactions whether or not made in cash and by way of as

mentioned in the Rules.

DCCBs should take appropriate steps to evolve a system for proper maintenance and
preservation of account information in a manner that allows data to be retrieved easily
and quickly whenever required or when requested by the competent authorities.
Further, banks should maintain for at least ten years from the date of transaction
between the bank and the client, all necessary records of transactions, both domestic
or international, which will permit reconstruction of individual transactions
(including the amounts and types of currency involved if any) so as to provide evidence
for prosecution of those involved in criminal activity, if necessary.
53
Banks should ensure that records pertaining to the identification of the customer and
his/her address (e.g. copies of documents like passports, identity cards, driving
licenses, PAN card, utility bills etc.) obtained while opening the account and during
the course of business relationship, are properly preserved for at least ten years.

3.4.1 Custody and preservation of branch documents

Important branch documents like License issued under Shop and Establishment Act
of the State concerned, Title deeds of the premises/lease deed of the branch and
indemnity bonds executed by clients, should be kept in fire-proof safe. All such
documents or any other document as prescribed by the bank should be recorded in
Branch Document Register and the new incumbent while taking over charge of the
branch should personally verify these documents and ensure its safe custody.

1.3.5 Training of Staff

Training to staff has to be a continuous process and everybody in the Bank should be
given the opportunity to enhance their knowledge and sharpen their professional
skills. Training Centres have to include a session on customer service as an integral
part of all the training programmes. Training in technical areas of banking are also to
be given to eligible/ identified staff and Bank has to adopt innovative ways of training
/ delivery ranging from job cards to mobile/visiting faculty to video conferencing. As
DCCBs do not have the opportunity to recruit staff on an ongoing basis, it is essential
that the capacity building of the available staff is given a high attention. The banking
industry like the Indian economy is moving very fast, and to keep pace with the
changes, the cooperatives will have to provide continuous exposure to their employees
the best and the latest happenings though participation in training, seminars and
workshops.

1.3.6 Customer Service

Management of the Branches is a reflection of efforts to provide better service to

customers and it should set higher standards of performance. These should be based
on principles of transparency and fairness and be oriented towards providing better
satisfaction of customers. A customer normally expects:

 Their banking needs are well taken care of and are offered the latest banking
avenues.
54
 That the schemes launched by the Bank are innovative, competitive and have a
‘Value for Money’.

 That he/she should be well received and provided with adequate infrastructure
facilities.

 That he/she will be properly guided and doubts, if any, are cleared in the local
language.

 That the ambience of the branch is kept clean and well organized.

 That an atmosphere of warmth and understanding prevails at the branch.

Therefore, branch management should ensure:

Providing adequate infrastructure facilities to customers

Branch should provide adequate space for customers to enable them to complete their
banking needs. Branches within the available space may plan the lay out in such a
manner that proper seating arrangements are provided to the customers including
pensioners, senior citizen and physically challenged persons. All the branches should
provide hygienic drinking water facility to the needy customers, without any
discrimination, at par with the Bank staff. Dealing staff are to be more sensitive to the
needs of senior citizen and physically challenged persons for portraying human touch
at all times. Branch premises should be kept clean and hygienic always.

Displaying indicator boards and business posters

With a view to ensuring that banking facilities percolate to the vast sections of the
population, branches should display indicator board at all the counters in trilingual
(English, Hindi and the regional languages concerned) and display business posters at
semi-urban and rural branches in the regional languages concerned.

Marketing of products

Any staff member may act as the Marketing Assistant for taking care of the inquiries
and requirements of the customers. These staff is expected to give a patient hearing to
the customers and help the customers in putting in their transactions.

Customers should be provided with the booklets or pamphlets describing all details
regarding services and facilities with expected time to be taken. Such information
should be available at the bank in Hindi, English and the regional languages
55
concerned.

As Bank’s dealings with the customers rest on ethical principles of integrity and
transparency, Bank’s brochures/booklets should contain the details of products and
services in Hindi, English and regional languages concerned.

Use of Hindi and regional languages in transacting business

In today’s highly competitive environment, ‘customer ecstasy’ can be achieved with

effective communication in a language known to the customer. All the staff members
should use English or Hindi or regional language while transacting business with
customers including communications to customers.

Review of the security system in the branches

Customers expect that the security system in their Bank branches is adequate to enable
them to complete their financial transaction with confidence. Bank staff should be
more vigilant during business hours and increase the surveillance in case of need.
Installation of CCTVs in the branches will instill confidence amongst the staff and the
public. Besides, such CCTVs are always in working conditions needs to be ensured.

Wearing identification badge with photo and name

Customers expect that they should know to whom they are talking to or dealing with.
As such, wearing of identity card by the staff members should be made compulsory
while on duty. Non-wearing of Identity card may be construed as misconduct.

Periodic change of desk / Job rotation

Job rotation gives an opportunity to the staff to become well versed with the work in
other sections and will enable them to perform duties efficiently anywhere to the
satisfaction of customers and the higher officials. Job rotation must be effected to staff
at branches. The bank should prepare a Job rotation policy for all staff members and
accordingly rotation of staff should done.

Visit by senior officials from controlling offices

Senior officials from controlling offices should visit all the branches in their control
once in half year and senior officials from Head Office may also visit the branches at
irregular intervals to assess the level of customer service.

56
Rewarding the branches on the basis of customer service

Branches may be rewarded on Annual performance on various business parameters.

To recognize the branches which excel in extending customer service in each region,
one branch can be considered as best branch based on the compliances in the
parameters known to all staff members for this purpose.

Customer Service Audit and Customer surveys

Bank has to conduct periodical surveys to get feedback from customers and their
expectations from the Bank to assess the overall level of customer service of our Bank
across the country.

Customer programmes and customer service committee meetings

Govt. of India and RBI have prescribed that branches should conduct monthly
customer service meets and send compliance to Controlling Offices/ Head Office.

Grievances Redressal Mechanism

NABARD has advised all cooperative banks to put in place an effective Grievance
Redressal Mechanism for bank’s customers. As per guidelines all complaints should
be disposed of within a period of 60 days and the complaints should be reviewed at
Board meetings at regular interval. Further, the name, designation, contact no. of the
officer appointed for the purpose should be forwarded to NABARD Regional Office.
The details of Grievance Redressal Officer should be displayed at Head Office and all
the branches of the bank.

1.3.7 Let us Sum-Up

House Keeping in any banking institution is the key to effective working. At each unit
of the Bank, the books of accounts need to be written on a daily basis and reconciled
periodically to ensure that there is minimum scope for any irregularities and frauds.
Summarily, the word housekeeping is used, as it is expected that every record is clean,
transparent, updated and kept in such a way that their retrieval is possible without
putting extra efforts. The internal checks and controls is an integral part of the
management of any business organization. Its major purpose is to keep clean
reconciled accounts. Each bank prescribes a certain period for preserving their
different records as per guidelines of Govt. of India/ RBI. Management of the Branches
is a reflection of efforts to provide better service to customers and it should set higher

57
standards of performance.

1.3.8 Check Your Progress

1. Suspicious Transaction Reports are submitted by all types of banks under PMLA
Rules, 2005 to:

a) RBI b) State Govt.

c) NABARD d) FIU-IND

2. Which of the following is not an objective of Internal Checks & Controls in banking?

a) Transactions are conducted only under specific or general authority to given to

specific staff.
b) Accounting norms and uniformity in practices are followed.
c) KCC cards are issued to all eligible customers.
d) Compliance with appropriate laws and regulations.

3. What is migration audit?

a) To check the staff loan balances upon transfer of officer to other branch
b) Verification of data consequent upon shifting to CBS
c) Verification of accounts in day book, subsidiary and general ledgers
d) Monitoring the shifting of banking books once a branch is shifted to new
location

4. Factors responsible for increase in frauds in banks are:

a) Encashment of forged documents b) Submission of forged documents

c) Operations of fictitious accounts d) All of the above
5. Which of the following is financial fraud or financial institution fraud?

a) Bank Frauds b) Wire Fraud

c) Antitrust Violations d) Tax Evasion

6. All cash transactions exceeding ___ are to be reported by branch to their H.O. for
onward submission to FIU-IND:
58
 a) ₹ 5 lakh b) ₹ 10 lakh
c) ₹ 15 lakh d) ₹ 20 lakh

7. The objective of Internal Checks & Controls is to:

a) Control wastage of resources b) Prevent errors and frauds

c) Verify the cash receipts and
d) Facilitate quick decisions
payments

8. Which of the following is not an element of Internal Control in a DCCB:

a) Ensure a proper financial accounting system is established

b) Honorarium to Board members is within RCS norms
c) Carry out inspection of money, stocks, other assets and documents in bank’s
custody
d) Ensure continuous updation of account books, no arrears in balancing of books
and transactions across all accounting-units are properly reconciled

9. What is full form of CISA?

a) Central Information Systems Agency b) Certified Industrial Security Advisor

c) Certified Information Systems d) Central Information & Security
Auditor Advisor

10. Banks to ensure that records pertaining to customer identification (e.g. copies of
passports, identity cards, driving licenses, PAN card, utility bills etc.) obtained while
opening the account and during business relationship, are properly preserved for:

a) At least 5 years b) At least 10 years

c) At least 15 years d) At least 20 years
Answer Key:

1: d 2: c 3: b 4: d 5: a

6: b 7: b 8: b 9: c 10: b

59
1.3.9 References for Further Reading

Gandhi R., Deputy Governor, RBI (February 9, 2016): "Rural Cooperatives:

Repositioning" - Lecture delivered at "National Conference of Cooperative Banks –
Regaining Leadership in Agricultural Finance” held at BIRD, Lucknow

Gazette of India (29.3.1985): "The Banking Companies (Period of Preservation of

Records) Rules, 1985", Published vide S.O. 267(E), Ext., Pt. II, Section 3(ii)

RBI Master Direction (Updated as on May 10, 2021) - "Know Your Customer (KYC)
Direction, 2016", Notification on RBI Website - www.rbi.org.in

SBI (01 March 2020): "Bank's Policy on Record Retention"

60
Lesson No. 04: Reports and Returns - MIS

1.4.1 What is Management Information System?

1.4.2 Role of MIS in Banking Industry

1.4.2.1 Returns for Internal Usage

1.4.2.2 Returns for Outside Regulatory Authorities

1.4.2.3 MIS and use of computers

1.4.3 Types of returns

1.4.3.1 Performance Returns

1.4.3.2 Statutory Returns

1.4.3.3 Control Returns to Controlling Offices/Head Office

1.4.3.4 Reports under AML prevention and KYC Guidelines

1.4.3.5 Other Returns

1.4.3.6 Control returns to Cooperative Department of the State Govt.

1.4.4 Analysis of Returns / Reports

1.4.5 Reporting by Rural Cooperative Banks to NABARD

1.4.5.1 Off-Site Surveillance System (OSS)

1.4.5.2 On-line Submission of OSS Returns through ENSURE Portal

1.4.5.3 ENQUIRE Module within ENSURE Portal

1.4.6 Let us Sum-Up

1.4.7 Check Your Progress

1.4.8 References for Further Reading

61
1.4.1 What is Management Information System?

In today’s business environment, the banking industry is under tremendous pressure

from many different parties to remain financially sound and exercise good judgment
when making decisions that can affect the general well-being of our economy. Central
regulators – RBI / NABARD and Govt. of India are particularly interested in the
actions that banks are taking for safety and transparency of the source and deployment
of resources. Strategic planning results in better financial performance based on
Return on Investments, Return on Equity, profit and increase in market share. In the
financial institution industry also we have to have comprehensive strategic planning
in place in order to measure the profitability and financial performance of the
institution. The planning can never be without compilation of current scenario,
historical data and future expectations. Accordingly, a sound Management
Information System (MIS) is imperative. MIS is a set of combined procedures
that gathers and produces efficient, timely, reliable, relevant, and
properly organized data that supports the decision making processes. The
important purpose of MIS is that the management of a bank should be well informed
about the business status vis-a-vis the targets. All policy decisions at macro level need
to be based on reliable MIS, otherwise the inferences/calculations made based on the
incorrect or incomplete data may lead to wrong decisions – a loss to the institution as
well as economy.

1.4.2 Role of MIS in Banking Industry

Management Information Systems are very useful tools for the purpose of reviewing
and controlling bank’s operations as a whole. The main goal of these systems is to
organize all data collected from every level of the bank (all branches and HO
departments), summarize it, and present it in a way that facilitates and improve the
quality of the decisions being made by top management to increase profitability and
productivity. Banks have transformed into “Financial Services Super Shoppe” where
they have become an instrument in providing financial assistance to some activities as
a policy for profitability or by Govt. regulation or for meeting socio-economic
obligations through the concept of one financial product or the other. Movement of
information in the form of data in prescribed or generated report or return is crux of
MIS. These systems are typically are computer-based including either simple excel
sheets or more complex platforms. The information being collected and gathered for
62
the system normally comes from both inside and outside sources. The data are
arranged orderly, processed and presented on palatable format so the managers can
easily evaluate various aspects of the bank's performance on a regular basis.

1.4.2.1 Returns for Internal Usage

Though there is a trend for presenting every bank branch as a profit centre,
procurement and deployment of resources are dependent on uniform central policy
and directions from Head Office of the Bank. Submissions of reports from bottom
level i.e. branch to the Head Office/controlling offices is a very important task and
precious input to take business decisions. All policy decisions of the management are
based on these reports. Maintenance of proper Cash Reserve Ratio / Statutory
Liquidity Ratio and Asset/Liability Management is possible only on timely submission
of statements by branches. There is a long list of statements which are required to be
submitted by the branches.

Some systems and procedures are set as policies by the bank. Depending upon the
policies, various administrative and operational instructions are given to the branches.
There are delegated powers that need to be used in some parameters. Various
decisions are taken at various levels in a bank. In this, human interface is always
involved. There may be a possibility of deviating from rules and regulations, doing
mistakes, committing frauds, accommodating someone in irregular way and selfish
behaviour of human beings. There may be instances that the administrative and
operational instructions are deliberately or unknowingly infringed. Control and
supervision is required on all operational matters. Therefore, it is necessary to call for
returns at controlling /Head Office level. Returns act like a mirror revealing what is
happening at the operational level. The MIS should give following updated
information / reports to the management:

 Status of Cash availability / requirements – Day transactions

 Customer account details - Non-moving / Dormant – SB/Current/Term deposits
 Status of individual account balances and their historical usage patterns.
 Loan sanctions / Loan defaults / Trends in loan requirements
 Sudden rise and fall in the account movements
 Customer feedback - expectations and perceptions
 Expenses / Incomes / Taxes / Document Flows, etc.
63
Based on these reports and the analysed data thereupon, the management of the bank
alerts or warns the internal control system at Head Offices to maintain mandatory
schedules, update urgent operational adjustments, initiate corrective measures, make
way for policy decisions, etc.

1.4.2.2 Returns for Outside Regulatory Authorities

Banking being a licensed activity need to report its status to regulatory agencies, like
RBI, NABARD, Income Tax Authorities and Financial Ministry of Govt. of India, etc.
These agencies need updated information collected from all banks and financial
intermediaries for taking stock at national level – may be for economic or monitoring
or supervising or security related issues.

1.4.2.3 MIS and use of computers

Almost all banks have switched to “Core Banking Solutions (CBS)” and their branches
are linked to centralized server. Periodical statements can be generated at any point of
time and in any required format. Now in the computerized environments, it is very
easy to take out statements and give indications also out of that. With centralized data
available at the banks’ head offices; they are not dependent on branches for submission
of returns. Branches have been made free from this work. They can concentrate on
customer service. The software systems are giving a daily report of exceptional
transactions. This is one of the very important tools for the branch managers as well
as at the control points at Head Office to know what the deviations are. This in itself
is a very important control measure on daily basis. Daily scrutiny of this statement for
each day’s transactions can prevent several future mishaps in time. The work load of
submitting various statements by branches to their controlling office / Head Office has
been considerably reduced in computerized environment.

1.4.3 Types of returns

Every bank has its set practice of statement and returns. The format and periodicity
of submission of statements or returns are prescribed by the bank. The periodicity
may be from daily, weekly, fortnightly, monthly, quarterly, half-yearly to yearly (e.g.,
Cash Report, Recovery statement, Advances and Deposits Statement, NODC
statement, NPA statement, Sundry Creditors/Sundry Debtors, Bank Reconciliation,
closing statement, etc.). However, after moving to CBS certain statements /
64
information are generated / accessed at bank’s HO as per needs and number of returns
from branches have been rationalised. The submission levels are decided depending
upon the administrative structure, urgency and usage pattern. Basically, there are
three types of returns:

1.4.3.1 Performance Returns

 Monthly performance reports showing deposit mobilization/ target/achievement.

The performance of a branch is primarily judged from these returns

 Monthly Profit and Loss Statement

 Statements showing loan disbursements

 Its periodicity may be monthly/quarterly/half yearly. Govt. of India/RBI

/NABARD monitors the loans disbursed by banks to priority sectors which include
advances to the weaker sections of the society. Lead Bank of the district collates
this information of all banks based on statements LBS- MIS-I Annual Credit Plan,
LBS-MIS-II Disbursement & Outstanding quarter ending position and LBS-MIS-
III Achievement vis-à-vis Target for the quarter ending position submitted by their
branches. The information is discussed at the quarterly meeting of Block Level
Bankers Committee (BLBC) as well at the District/ State level Bankers’
Coordination Committee meetings held quarterly. From the SLBC level LBS-MIS-
IV State wise Financial Inclusion Plan (annually) and LBS-MIS- V Progress under
Financial Inclusion Plan (Quarterly) sent to RBI.

 Statement showing outstanding of Priority Sector Advances :

 This is very important statement with regard to the achievement of priority sector
advances under various heads as set by Govt. of India/ RBI. Normally, its
periodicity is quarterly. For Rural Cooperative Banks all the advances are
construed as priority sector and no stipulation of priority sector lending like RRBs,
Urban Cooperative Banks, Commercial Banks and Small Finance Banks.

 Statement of new deposit and advances accounts booked during the month.

 Monthly statement of sundry and suspense account

 Monthly statement of miscellaneous expenses and expenses incurred beyond the

discretionary powers.
65
1.4.3.2 Statutory Returns

 Monthly/Quarterly/Half-yearly/Annual Closing Returns: Closing returns in

various formats are submitted by branches half yearly/annually. Statutory
Auditors go through these statements very carefully. The financial reports of the
banks are required to be prepared compulsorily and submitted to NABARD/RBI
as per RBI Act/ Banking Regulation Act.

 Weekly abstract balances of all accounts of the branches: Demand and Term
Liabilities of the Bank is required to be calculated on the basis of this statement for
the purpose of maintaining correct SLR/CRR on fortnightly basis and any mistake
in this regard attracts penalty to the concerned bank.

 Unsecured advances to directors/their relatives and observance of RBI guidelines

in this regard.

 Application for issue of license for commencing banking business (establishment

of new cooperative bank)

 Opening of new place of business by StCBs

 Statement of office opened & closed both StCBs and DCCBs

 Asset liabilities as on the last Friday of the month

 Reports on frauds/misappropriation and actions taken in this regard

 Report on Inoperative accounts wherein there were no transactions for the last 10
years.

 The NABARD had introduced Off-site Surveillance System and prescribed OSC 01
to 08 Returns in September 1998 under Section 27(3) of BR Act, 1949 as a
supplement to on-site inspection with the objective of promptly detecting areas of
supervisory concerns on a continuous basis and providing warning signals to
banks. These returns/system was again reviewed in 2008 and 2011. After
comprehensive review and taking into account technological and other
developments in banking scenario revised OSC Returns were introduced in
February 2012 and the banks were required to submit the same electronically with
maker and checker facility at ENSURE portal of NABARD.

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 The RBI has circulated detailed guidelines on DEAF (Depositor Education and
Awareness Fund Scheme) in May 2014 and prescribed various quarterly and an
Annual Return for deposit accounts not operated over ten years and above under
Section 26A of BR Act 1949 (AACS). All the Cooperative Banks should strictly
adhere to the Fund guidelines including disclosure of sums transferred to RBI
under Notes on Accounts to its Balance sheet. The Statutory Auditors should
comment on the implementation of the scheme and verify the returns submitted.
Details of the DEAF returns and its periodicity to submit to RBI are as under :

Number Particulars of the form Periodicity

1 Form-1 Consolidated amount on the date of transferring As & when sent

2 Form-2 Total amount of fund transferred Monthly

3 Form-3 Refund from DEAF account Monthly

Consolidated amount claim made

4 Form-4 Monthly
by bank from the fund

Amount due outstanding

5 Form-5 Annually
(position of calendar year)

1. 4.3.3 Control Returns to Controlling Offices/Head Office

Statement of loans sanctioned under the delegated powers including temporary

overdrafts:

 Statement showing irregular loans and Non-performing Assets: All banks are
monitoring irregular loan accounts periodically and the position of recovery in NPA
accounts. The position of such accounts is submitted by branches to their
controlling offices/Head Office for the purpose of arriving at provisions to made at
the apex level before finalizing statutory financial reports.

 Follow up reports of action taken against the borrowers for recovery

 Statement of expenses incurred beyond allocated budgets.

 Statement of Inter-branch / Head Office transactions

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 Housekeeping position of branches

 Review of action taken on internal inspection reports and compliance.

 Cash Transaction Reports

 Suspicious Transaction Report

 Details of Impounded/ Counterfeit Notes as per RBI latest guidelines

1.4.3.4 Reports under AML prevention and KYC Guidelines

In accordance with the Prevention of Money-laundering Act, 2002, every banking

company, financial institution and intermediary are to furnish information to
Financial Intelligence Unit –IND (Ministry of Finance) information relating to -

 All cash transactions of the value of more than rupees ten lakhs

 All series of cash transactions integrally connected to each other which have been
valued below rupees ten lakhs where such series of transactions have taken place
within a month;

Every banking company, financial institution and intermediary shall furnish to FIU-
IND information of all suspicious transactions whether or not made in cash.
Suspicions transactions include an attempted transaction, whether or not made in
cash which, to a person acting in good faith -

 Gives rise to a reasonable ground of suspicion that it may involve proceeds of an

offence specified in the Schedule to the Act, regardless of the value involved; or

 Appears to be made in circumstances of unusual or unjustified complexity; or

 Appears to have no economic rationale or bona fide purpose; or

 Gives rise to a reasonable ground of suspicion that it may involve financing of the
activities relating to terrorism;

Broad categories of reason for suspicion and examples of suspicious transactions for a
banking company are indicated as under:

Identity of client

 False identification documents

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 Identification documents which could not be verified within reasonable time

 Accounts opened with names very close to other established business entities

Background of client

 Suspicious background or links with known criminals

Multiple accounts

 Large number of accounts having a common account holder, introducer or

authorized signatory with no rationale

 Unexplained transfers between multiple accounts with no rationale

Activity in accounts

 Unusual activity compared with past transactions

 Sudden activity in dormant accounts

 Activity inconsistent with what would be expected from declared business

Nature of transactions

 Unusual or unjustified complexity

 No economic rationale or bona fide purpose

 Frequent purchases of drafts or other negotiable instruments with cash

 Nature of transactions inconsistent with what would be expected from declared

business

Value of Transactions

 Value just under the reporting threshold amount in an apparent attempt to avoid
reporting

 Large sums being transferred from overseas for making payments

 Inconsistent with the clients apparent financial standing

 Inconsistency in the payment pattern by client

 Block deal which is not at market price or prices appear to be artificially

inflated/deflated

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Periodicity to report the transaction to FIU-IND

 Cash Transaction report is 15th day of following month

 Suspicious transaction report within by 7 working days
 Counterfeit currency report by 15th day of following month
 Every overseas wire transfer if the value of such transfer is more than ` 5 lakh in

Indian rupees by 15th of following month.

 Every sale or purchase of immovable property which the value is ` 50 lakh or more

by 15th day of following month.

1.4.3.5 Other returns

 Monthly Report on serious irregularities/frauds/misappropriation which have

come to light during the month.

 Quarterly Review of Annual Business Plan

 Half yearly review of capital expenditure vis-à-vis capital budget

 Half yearly review of customer service

 Half yearly review of security arrangements

 Analysis of wide variations in expenditure heads

1.4.3.6 Control returns to Cooperative Department of the State Govt.

The State Cooperative Acts have empowered the Registrar of Cooperatives for calling
the information about the banks. He/she calls certain returns from banks. These
returns are mainly about the balance sheet and financial position of the bank.

1.4.4 Analysis of Returns / Reports

It is generally experienced that in banks statements, submission is given least priority

amongst all other works. The receiver of the return also takes it in a routine manner,
acknowledging just the receipt and filing it. Actually, this is not expected. The
originator of the return should also understand about the return he/she is sending. It
should not be treated as a ritual in sending and receiving the control return. The return
must be timely submitted.

70
However, to make effective use of the control returns, the supervisory staff performing
the job of control and supervision must be able to understand the use of returns. Such
staff must develop a screening insight that can give him/her a proper information and
early warning signal about the state of affairs from where the control return has come.
For this purpose, the top managements of the bank should arrange proper training to
its officers to train them as how to analyse and study the returns, what exactly should
be seen out of it and how to catch signals from it. On receipt, the statement must be
scrutinized in depth to know about what it shows. Corrective or remedial actions, if
required must be immediately taken. Effective screening of control return certainly
keeps the bank on proper path in all respects. The bank then turns as a financially
sound bank with no deviation from the legal provisions and the rules, regulations and
directives of the regulators such as RBI and cooperative department of the State Govt.

Financial statement analysis is a method or process involving specific techniques for

evaluating risks, performance, financial health, and future prospects of an
organization. Common methods of financial statement analysis include fundamental
analysis, DuPont analysis, horizontal and vertical analysis and the use of financial
ratios. Historical information combined with a series of assumptions and adjustments
to the financial information may be used to project future performance targets and
strategies. The Chartered Financial Analyst designation is available for professional
financial analysis. These reports are discussed in many high-powered committees, like
ALCO, Audit, etc.

1.4.5 Reporting by Rural Cooperative Banks to NABARD

RBI enjoys extensive powers of supervision, regulation, and control over commercial
and co-operative banks. The system of Off-Site monitoring and surveillance system
has been introduced by RBI effective from March 1996 and banks are required to
furnish DSB Returns. DSB Returns are statutory returns being called by RBI in
exercise of power vested in its u/s 27(2) of Banking Regulation Act, 1949. Powers
have been delegated by RBI to National Bank for Agricultural and Rural Development
(NABARD) under Sec 35 (6) of the Banking Regulation Act (As Applicable to
Cooperative Societies) to conduct inspection of State and Central Cooperative Banks
and Regional Rural Banks (RRBs). Accordingly, all returns are required to be
submitted by RRBs and Rural Cooperative Banks to NABARD for the purpose of

71
supervision and operational control.

1.4.5.1 Off-Site Surveillance System (OSS)

The system of Off-Site Surveillance was continued by NABARD as a supplement to on-

site inspection, with the objective of promptly detecting areas of supervisory concern
on a continuous basis and providing warning signals to banks. (NABARD DoS Circular
No. SCB/CCB-05/98-99 dated 12 September 1998). Developments such as
deregulation and increased freedom given to banks in various aspects such as product
design, pricing etc., as also the advent of technology had increased the complexities in
the functioning of banks as also the risks. A robust Off-site Surveillance System which
can provide continuous insights into the various aspects of functioning of banks was
introduced with provision of a software application (a Return Preparation Utility) for
feeding data in these returns. Major issues included in the guidance note are as:

i) Revised OSS returns: OSS returns initially covered only some aspects of the
functioning of banks. However, due to various reforms brought out in the financial
system during the last decade as also the changes in regulatory and supervisory
systems, banks have since grown many times in terms of business volume, number of
products, number of clients served, etc. New OSS returns were introduced and
designed in such a way that they would serve the supervisory requirements of
NABARD, besides they suffice the MIS needs and strengthen the MIS capabilities
within the reporting institutions. Further, due to full-fledged use of technology right
from the return preparation stage, banks need only to provide minimum information
regarding various aspects of its functioning and the data processing requirements
would be taken care of by the software itself.

ii) OSS returns are statutory: These returns are prescribed by NABARD in
exercise of the powers conferred under section 27(3) of the Banking Regulation Act,
1949 (AACS) and are, hence, statutory in nature.

iii) Reporting and Record keeping obligation: Reporting banks are required
to keep copies of the returns/reports and the detailed notes used in their preparation
for a period of 3 years.

iv) Returns to be submitted by banks to NABARD RO: In all eight Returns

are to be submitted to NABARD by banks under this package which are as follows:

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Sr. No. Name of the Return Periodicity

1 OSC-1 Statement on Assets and Liabilities Quarterly

2 OSC-2 Statement of Earnings Quarterly

3 OSC-3 Statement on Segment/ Sector-wise Advances Quarterly

4 OSC-4 Statement on Asset Quality Quarterly

5 OSC-5 Statement on NPAs, OTS, Write-off and Large Advances Quarterly

6 OSC-6 Statement on Management Yearly

7 OSC-7 Statement on CRAR Yearly

8 OSC-8 Statement on Bank Profile and Frauds Quarterly

v) Preparation and Submission of OSS Returns: Banks may prepare the

returns using software provided for the purpose. Once the returns are filled
completely in and duly validated, an encrypted file containing data can be generated.
Banks may send this encrypted file to concerned RO of NABARD through e-mail or
CD by the prescribed due date. Banks have to designate and authorize one or two
senior official/s who would be responsible for the correct compilation and timely
submission of these returns and who would be fully responsible for the information
furnished therein. General guidelines for filling up the returns have been given in
NABARD Circular No. 124 /DoS-15/2012 dated 04 May 2012.

1.4.5.2 On-line Submission of OSS Returns through ENSURE Portal

As the RCBs gained experience in online submission of submitting OSS returns

through prescribed software, NABARD, vide its Circular No. 37/DoS-02/2015 dated
04 March 2015), decided to implement a new web based online portal for submission
of these returns. Main benefits of the new portal to banks would be:

a) As it is a web based portal, there would not be any need for installation / updation
of the software at the bank level.
b) As banks would directly upload the returns to NABARD, there would be no need to
send any files through e-mail.

73
c) Returns can be prepared on-line directly, or alternatively, they can be prepared off-
line in user friendly Excel formats that could be downloaded from the portal and
then upload them.
d) No need to resubmit the data/information once submitted to NABARD for any
other purpose - say, for example, data submitted under OSS need not be submitted
again for on-site inspection purpose.

While the broad contours of the existing return structure would not undergo any
change, some changes and submission structure has been made. Banks may study
these changes and bring improvements in their internal MIS to match it.

Sr. No. Name of the Return Periodicity

OSS Returns

1 OSC-1 Statement on Assets and Liabilities Quarterly

2 OSC-2 Statement of Earnings Quarterly

3 OSC-3 Statement on Segment/ Sector-wise Advances Quarterly

4 OSC-4 Statement on Asset Quality Quarterly

5 OSC-5 Statement on NPAs, OTS, Write-off and Large Adv. Quarterly

6 OSC-6 Statement on Management Yearly

7 OSC-7 Statement on CRAR Yearly

8 OSC-8 Statement on Bank Profile Yearly

9 OSC-9 Statement on Demand, Collection and Balance Yearly (30.06)

Returns on Frauds and Dacoity

1 FMS-1 Report on Actual / Suspected Frauds As and when occurs

2 FMS-2 Frauds Outstanding and all New Cases of Frauds Quarterly

3 FMS-3 Progress in Disposal of Fraud Cases Quarterly

4 FMS-4 Report on Dacoity /Robberies /Thefts /Burglaries Quarterly

74
NABARD, vide its Circular No. 52/D0S-05/2017 dated 07 March 2017, has advised
RCBs to dispense away the manual submission of OSS returns and switch to ENSURE
portal only. Again, to reiterate, above OSS / FMS returns are prescribed by NABARD
in exercise of powers conferred under Section 27(3) of BR Act, 1949 (AACS) - Hence,
are statutory in nature.

The above web based ENSURE portal is now being utilized by banks for exchange /
submission of certain other statements/information as prescribed by NABARD, e.g.:

 Circular No. 37/D0S-07/2018 dated 09 March 2018 : Two ALM (Asset Liability
Management) returns viz., Statement of Structural Liquidity (SSL) and Statement
of Interest Rate Sensitivity (SIRS) at quarterly intervals;
 Circular No. 39/D0S-09/2018 dated 09 March 2018: Banks were authorized to
generate of Performance Assessment Report (PAR) of their bank analysed in
ENSURE in order to provide timely feedback and identify areas / issues which need
special attention for improvement.
 Circular No. 236/D0S-36/2020 dated 07 September 2020 : Two returns
regarding KYC Directions, 2016 viz., "KYC Statistics" and "KYC Directions- Status
of Compliance" on a quarterly basis within 15th day from the end of every quarter.
 March 2016 : Both StCBs and DCCBs were advised to that "Inspection Statements"
which were submitted by banks to NABARD before the commencement of on-site
inspection may be submitted through ENSURE portal.

1. 4.5.3 ENQUIRE Module within ENSURE Portal

Since introduction of ENSURE portal for banks by NABARD in March 2015, banks
have been submitting various returns through the portal. Though banks have become
familiar to the portal, issues are being faced while submitting various returns or
generating reports. Department of Supervision of NABARD Head Office has been
responding to the queries raised by banks. Keeping in view the importance of timely
and seamless resolution of complaints/issues/queries, ENQUIRE (ENSURE QUeries
and Issues REsolution) module has been set up within the existing ENSURE portal to
handle all complaints/issues/queries related to creation and updation of User IDs,
submission of returns, generation of reports etc. User manual to use this ENQUIRE
module has been shared by NABARD vide Circular No. 326/D0S-52/2020 dated 11
December 2020 for operational reference.
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1.4.6 Let us Sum-Up

Information flow regarding status of any kind of business is imperative for ensuring
proper and timely business decision having a direct effect on its productivity and
profitability. It is more so necessary in banking sector where accuracy, transparency
security of data relating to public deposits and debts is the key element for success and
faith. Efficient and accurate submissions of reports from bottom level i.e., branches
to the Head Office/controlling offices to the Management to regulatory authorities and
Governments form a logical chain to maintain systems of operational, administrative
importance and also those involving public law and order. All policy decisions are
based on these reports. Every bank has its set practice of statement and returns. The
format and periodicity of submission of statements or returns are prescribed by the
bank. The State Cooperative Acts have empowered the Registrar of Cooperatives for
calling information from the banks. Similarly, RBI, NABARD and Finance Ministry
needs regular transactional data of banks and also their customers on a statutory basis.
Banking Regulation Act, 1949 (AACS) and latest amendment in September 2020 have
strengthened statutory powers of RBI and NABARD in as far as demanding certain set
if information on a periodic basis. To make the submission of information less difficult
and avoid repetitions / duplications for Rural Cooperative Banks, NABARD has
introduced web based ENSURE portal that allows both way information flow.

1.4.7 Check Your Progress

1. Under powers of which Act, NABARD is empowered to call for statutory Off-Site
Surveillance returns from Cooperative Banks?

a) RBI Act, 1934 b) BR Act,1949 (AACS)

c) NABARD Act, 1981 d) Coop. Soc. Acts of States

2. FMS-1 Report regarding details on Actual / Suspected Frauds is to be submitted

by Cooperative Banks at _______ intervals.

a) Quarterly b) Half Yearly

c) Yearly d) As and when incident occurs

3. Under which scheme RBI asked banks to submit a return giving details of deposit
accounts that are not operated for over ten years?
76
 a) Lead Bank Scheme b) DEAF Scheme
c) Educational Loan Scheme d) Banking Ombudsman Scheme

4. What is the periodicity of return called for under the scheme mentioned in question
3 above.

a) Fortnightly b) Monthly
c) Semi Annual d) Annual

5. All cash transactions exceeding ___ are to be reported by branch to their H.O. for
onward submission to FIU-IND:

a) ₹ 5 lakh b) ₹ 10 lakh
c) ₹ 15 lakh d) ₹ 20 lakh

6. OSS return are prescribed by NABARD in exercise of the powers conferred under
of which section of BR Act, 1949 (AACS)?

a) Section 27 (3) b) Section 29

c) Section 35 (2) d) Section 35 (6)

7. For how much time period, Cooperative Banks are required to keep relevant notes
and documents used to prepare OSS returns?

a) 2 Years b) 3 Years
c) 4 Years d) 5 Years

8. Various returns / reports to be submitted by Cooperative Banks to NABARD

through ENSURE are prepared using _________.

a) Excel Sheets to be zipped & mailed b) Specific Application Software

c) On Web-based Portal d) To be submitted in a CD

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9. The acronym ‘ENQUIRE’ has its full form as ___________.

a) ENSURE Query Resolution b) Enquiry Used In Resolutions

c) ENSURE Queries and Issues d) None of the above – Simple Enquiry
Resolution based system

10. Under Section 46 of which of the following Acts, non-submission of or wrong

reporting in Statutory returns by Cooperative Banks being called by RBI / NABARD
invites penalties?

a) BR Act, 1949 b) RBI Act, 1934

c) NABARD Act, 1981 d) Indian Penal Code, 1860

Answer Key:

1: b 2: d 3: b 4: d 5: b

6: a 7: b 8: c 9: c 10: a

1. 4.8 References for Further Reading

Das Shaktikanta, Governor, RBI (16 Jan 2021): “Towards a Stable Financial System”,
Nani Palkhivala Memorial Lecture

Gupta Anurag (2019): “A Study on Role of Information Systems in Banking”,

International Journal of Science and Research (IJSR), Volume 8 Issue 7, Pg 1450-1454

NABARD Circulars: on OSS, ENSURE and ENQUIRE modules cited in para 4.5 of
the chapter above

RBI Publication (29 Dec 2020): RBI Report on Trends and Progress of Banking in
India” for the year ended June 30, 2020

Sathiyaseelan V. and Shanmugasundaram G. (2014): “Management Information

System Operational and Employees Efficiency of Cooperative Banks in India”,
International Journal of Management and International Business Studies, Volume 4,
Number 3, Pg 309-316

78
Lesson No. 05: Lead Bank Scheme

1.5.1 Lead Bank Scheme - Genesis

1.5.2 Objectives of Lead Bank Scheme and Functions of Lead Bank
1.5.3 Governance Structures under Lead Bank Scheme
1.5.3.1 Lead District Manager
1.5.3.2 Various forums/committees under LBS
At Block Level – BLBCs
At District Level – DCC / DLRC
At State Level – SLBC
1.5.4 Implementation of Lead Bank Scheme
1.5.4.1 Service Area Approach
1.5.4.2 Sub Service Area Approach
1.5.4.3 Preparation of District / State Credit Plans
Potential-linked Credit Plan (PLP)
District Credit Plan / Annual Action Plan
1.5.4.3 Monitoring of LBS by RBI - Revised Mechanism of Data Flow / MIS
1.5.5 Review and Revamp of the LBS from time to time
1.5.5.1 Working Group to review LBS, 1981
1.5.5.2 Usha Thorat Committee on Review of LBS, 2009
1.5.5.3 Committee of Executive Directors
1.5.6 Let us Sum-Up

1.5.7 Check Your Progress

1.5.8 References for Further Reading

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1.5.1 Lead Bank Scheme – Genesis

The Banking industry in India has emerged as one of the accredited agencies for
providing rural credit after independence. It emerged as an effective instrument of
rural reconstruction and development. A number of novel and innovative schemes
and programmes have been designed, conceptualised and implemented. Amongst
them, the Lead Bank Scheme (LBS) introduced by Reserve Bank of India (RBI) in
1969, which came into operation after 1972, plays a strategic role in the Indian
economy. This can be considered as the oldest financial inclusion programme.
Introduction of the LBS can be traced to certain studies and recommendations
indicated hereunder:

i) In pursuance of a decision of the National Credit Council, at its meeting held on

July 24, 1968, a Study Group was appointed in October 1968 on the ‘Organizational
Framework for the Implementation of Social Objectives’ to lay down guidelines to be
followed by financial institutions to determine credit quantum to various sectors of
economy in accordance with the national priorities. The study group led by Prof. D.
R. Gadgil submitted its report in October 1969 and highlighted that banking needs of
the rural areas in general and backward areas in particular were not being adequately
taken care of by the commercial banks (CBs). The Study Group drew attention to the
fact that commercial banks did not have adequate presence in rural areas and also
lacked the required rural orientation. As of June 1967, the CBs had penetrated only to
5000 villages and were serving an average population of as high as 73,000 as against
4,000 in United Kingdom and 7,000 in USA. Moreover, of the institutional credit to
agriculture at 39%, their share was negligible at 1%; the balance being met by the co-
operatives. Besides, credit needs of Agriculture, SSIs and allied activities including
self-employed and professionals, etc. remained virtually neglected. The Group
recommended the adoption of an Area Approach for bridging the spatial and structural
credit gaps by evolving appropriate plans and programmes.

ii) All India Rural Credit Review Committee (1969) endorsed the view that CBs should
increasingly come forward to finance varied economic activities in rural areas.

iii) A Banker’s Committee set-up by RBI on ‘Branch Expansion Programme’ and

chaired by Shri F. K. F. Nariman endorsed the idea of area approach in its report
submitted on 15 November 1969. It recommended that in order to enable the public
80
sector banks to discharge their social responsibilities, each bank should concentrate
on certain districts where it should act as a 'Lead Bank'.

1.5.2 Objectives of Lead Bank Scheme and Functions of Lead Bank

Under LBS and adoption of its ‘Area Approach’, a district was taken as a unit for
planning as most statistical and other data were available at the district level. The RBI
assigns the role of lead bank to any one of the leading banks in each district. The lead
bank is entrusted upon the responsibility of development through credit on a holistic
basis in that district through identification, assessment and implementation taking
due care of spatial spread. The lead bank coordinates with various local financial-
market stakeholders, both private and governmental, to address bottlenecks in the
provision of financial services.

Similarly, a ‘Convenor Bank’ is nominated state-wise to follow very closely the progress
of all lead banks in that state and to way forward the coordinated efforts, initiatives,
decisions and programmes of Govt. agencies and other stakeholders.

The assignment of lead bank responsibilities to designated banks in every district is

done by Reserve Bank of India based on certain parameters and procedure. The need
to fresh notification in this regards arises when any district or State is bifurcated. As
on March 31, 2021, 12 public sector banks and one private sector bank have been
assigned Lead Bank responsibility in 730 districts of the country. Similarly, the SLBC/
UTLBC convenorship of 28 States and 8 Union Territories has been assigned to 11
public sector banks and one private sector bank. Of late, with coverage of all districts
in metropolitan areas, entire country has been brought under the fold of the LBS.

The Scheme has no intention to award monopoly of banking business to any particular
Bank. The Lead Bank is expected to assume leadership role and act as a consortium
leader for co-ordinating the efforts of all the stakeholders in the district or State. Other
major objectives and functions envisaged under LBS are highlighted as under:

Focussed proactive participation by banks and financial institutions in achieving

full financial inclusion;
Spread financial awareness in unbanked and under-banked areas and evaluate
their physiographic, agro climatic and socio-economic conditions through
economic surveys of resources and potentials;
81
 Ensuring structural and procedural changes in banking sector and branch network;
Reducing financial and developmental imbalances among regions and sectors
through adequate deposit mobilisation and appropriate credit deployment,
specifically to the priority sector;
Examining all available and needed facilities for agricultural and industrial sectors
both for production and marketing of their produce; stocking of fertilisers and
other agricultural inputs; repairing and servicing of equipment; storage and
warehousing space, and linkage of credit with marketing in the district;
Identification of certain credit gaps in various sectors which need to be addressed
through prudent planning;
Development and Maintenance of cooperation and coordination amongst financial
and non-financial institutional actors in the district ;
Full computerisation and data management in all banks must be in order and the
banks involved should be able to periodically prepare and review reports, yearly
draft plans, and financial inclusion plans, from time to time;
Preparation of district credit plans / annual action plans (DCP/AAP) for the district
after taking into account the annual estimated commitments of individual financial
institutions, as also the estimated expectation of Government departments in
consonance with local and State / National level plans.

1.5.3 Governance Structures under Lead Bank Scheme

1.5.3.1 Lead District Manager

In order to ensure smooth functioning and monitor achievement of objectives set

under LBS, the Lead Bank has been asked by RBI to place an officer of appropriate
level, attitude and possessing requisite leadership skills as Lead District Manager
(LDM). The office of LDM should be sufficiently strengthened with required human
assistance and appropriate infrastructural support. Apart from achieving objectives
as set out under LBS, the usual role of LDMs revolves around district credit planning,
convening of periodical meetings of various forums envisaged under LBS and as
catalytic and coordinating agent involving bankers, DDM of NABARD, private and
Govt. agencies and stakeholders in the district.

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1.5.3.2 Various forums/committees under LBS

Various forums have been created at the block level, district level and the State level,
under the Lead Bank Scheme for co-ordination of activities of commercial banks and
other financing agencies on the one hand and Government departments on the other.
These forums are also helpful for discussing problems in implementing the credit
plans and finding out solutions for them, as also monitoring the progress in
implementation of the credit plans.

At Block Level - BLBCs

To corroborate basic philosophy of bottoms-up planning and participatory approach,

a base level forum has been envisaged as Block Level Bankers’ Committee (BLBC). All
the branch managers of banks operating in the block including District Central Co-
operative Banks (DCCBs), Regional Rural Banks (RRBs) and private / foriegn banks;
Block Development Officer and their staff; and other technical officers in the block,
such as extension officers from agriculture and allied sectors, industries are members
of the Committee. The LDM has been delegated the responsibility as the Chairman
and convenor of BLBC, meetings of which are held at quarterly intervals. The Lead
District Officer of RBI and DDM from NABARD also attend the meetings of the BLBCs.

Major functions of BLBCs are to review, monitor and resolve operational and conflict
issues in implementation of block credit plan and Govt. sponsored schemes.

At District Level – DCC / DLRC

At the district level, District Consultative Committees (DCCs) and District Level
Review Committees (DLRCs) have been constituted as detailed below:

District Consultative Committees (DCCs)

DCC is conceived to be a quarterly forum for bankers as well as government

agencies/departments to come to a common platform to find solutions to the problems
arising hindering the smooth functioning of various developmental activities under
the LBS at district level. The District Collector is the Chairman of the DCC meetings.
Reserve Bank of India, NABARD, all the commercial banks including Small Finance
Banks, Wholly Owned Subsidiaries (WOS) of Foreign Banks, RRBs, Payments Banks,
Co-operative banks, various State Government departments and allied agencies are

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the members of the DCC. Some of the common and illustrative areas for discussion
and redressal in DCC are:

Review of performance of banks under District Credit Plan (DCP); Assistance

under Government sponsored schemes; Flow of credit to priority sector and weaker
sections
Review of progress and all inhibiting issues relating to Financial Inclusion Plan;
'Enablers' and 'impeders' for banking development for inclusive growth.
Doubling of Farmers’ Income by 2022
Initiatives for providing 'Credit Plus' activities by banks and State Governments
such as setting up of Financial Literacy Centres (FLCs) and RSETI-type Training
Institutes for providing skills and capacity building to manage businesses.
Scaling up financial literacy efforts to achieve financial inclusion.
Credit aspects - Educational loans; SHG - bank linkage; SME financing &
bottlenecks thereof; Review of relief measures wherever applicable
Timely submission of data by banks

Sub-Committees of DCC are constituted separately to intensively work on specific

issues, particularly when membership of DCC exceeds manageable levels. These sub-
Committees submit their report and finding for discussion in main DCC.

District Level Review Committees (DLRCs)

DLRC meetings are Chaired by the District Collector and attended by members of the
District Consultative Committee (DCC). Public Representatives i.e. Local MPs/MLAs/
Zilla Parishad Chiefs are also invited to these meetings. Responses to queries from
public representatives need to be accorded highest priority and attended to promptly.
The follow up of the DLRC’s decisions is required to be discussed in the DCC meetings.
The DLRC meetings should be convened by the Lead Banks at least once in a quarter.

At State Level – State Level/UT Level Bankers' Committee (SLBC/UTLBC)

This apex inter-institutional forum is one of the most effective forum under the LBS
for quick formulation and implementation of policy / relief decisions especially under
emergent situations like natural calamities. It comprises representatives of
commercial banks including Small Finance Banks, Wholly Owned Subsidiaries (WOS)
of Foreign Banks, RRBs, Payments Banks, State Cooperative Banks, RBI, NABARD,
heads of Government departments including representatives from National
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Commission for Scheduled Castes/Tribes, National Horticulture Board, Khadi &
Village Industries Commission etc. The Chief Minister / Finance Minister of the State
and Deputy Governor / Executive Director of RBI, Research Institutions,
academicians must be occasionally invited as 'special invitees' both for adding value to
the discussions and also associate them with need and formulation of developmental
policies. A High Level of participation in SLBC / UTLBC meetings ensures an effective
and desired outcome with meaningful discussion on issues of public policy of both the
Government of India and the RBI.

The responsibility for convening the SLBC meetings would be of the SLBC Convenor
Bank of the State. SLBC meetings are required to be held regularly at quarterly
intervals. The meetings are chaired by the Chairman/ Managing Director/ Executive
Director of the Convenor Bank and co-chaired by the Additional Chief Secretary or
Development Commissioner of the State concerned. In cases where the MD / CEO /
Executive Director of the SLBC Convenor Bank is unable to attend SLBC Meetings, the
Regional Director of the RBI shall co-chair the meetings along with the Additional
Chief Secretary/Development Commissioner of the State concerned.

Pursuant to recommendations of Smt. Usha Thorat Committee, RBI laid special

emphasis on functioning and utilisation of SLBC forum and issued guidelines for
meaningful SLBC meetings. Some of the highlights are as under:

State Level Bankers’ Committee meetings should primarily focus on policy issues
with participation of only the senior functionaries of the banks/ Government
Departments. All routine issues may be delegated to sub-committee(s) of the SLBC.
A Steering Sub-committee may be constituted in the SLBC to deliberate on agenda
proposals from different stakeholders and finalise a compact agenda for the SLBC
meetings. Typically, the Sub-Committee could consist of SLBC Convenor, RBI &
NABARD representatives & senior State Government representative from the
concerned department, e.g. Finance/ Institutional Finance and two to three banks
having major presence.
Other issue-specific sub-committees may be constituted as required. The sub
committees may examine the specific issues relating to agriculture, micro,
small/medium industries/enterprises, handloom finance, export promotion and
financial inclusion, etc. in-depth and devise solutions/recommendations for
adoption by the full committee.
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 To improve the effectiveness and streamline the functioning, SLBC Convenor
Banks have been advised to prepare a yearly calendar of programmes in advance.
An illustrative agenda for deliberating all possible financial, developmental and
banking related issues was revised. It can be studied in detail for further reference
in Master Circular on Lead Bank Scheme issued by RBI vide circular No. RBI/2021-
22/04 or FIDD.CO.LBS.BC.No.02/02.01.001/2021-22 dated 01st April 2021.

1.5.4 Implementation of Lead Bank Scheme

1.5.4.1 Service Area Approach (SAA)

In his budget speech for the year 1988-89, the Union Finance Minister had proposed
a designated command area under each bank branch for dispensation and
management of development through credit. On the basis of the recommendation of
the Dr. P. D. Ojha Committee set up by the RBI, a decentralized planning policy was
adopted and Service Area Approach to Rural Lending was introduced with effect from
April 1, 1989. Accordingly, about 15 to 25 villages were allocated to each bank branch
based on their proximity and contiguity without their interception by another bank
branch. Service Area Credit Plans were prepared and monitored in BLBCs,
particularly the Govt. sponsored programmes.

However, due to allotment of villages, the activities of the ‘service area branches’ were
restricted to the allotted villages and they were unable to provide financial assistance
outside their service areas, despite being in a position to do so. Similarly, borrowers
belonging to these villages, even if dis-satisfied, were not in a position to avail of
services of any other bank branch. The SAA scheme was reviewed by an “Advisory
Committee on Flow of Credit to Agriculture and Allied Activities” (Chairman: Prof.
V.S. Vyas, June 2004) that recommended removal of restrictive provisions.
Accordingly, vide RBI’s notification RBI/2004-05/293 dated 08th December 2004, the
allocation of villages among the rural and semi-urban branches of banks were made
not applicable for lending under SAA except under Government Sponsored Schemes.
Thus, while the bank branches are free to lend in any area, the borrowers have the
choice of approaching any branch for their credit requirements.

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1.5.4.2 Sub Service Area Approach

Under the Financial Inclusion Programme ‘Swabhiman’, Banks are providing banking
services all most all the villages in the country in their service area. This, inter alia,
included to establish Business Correspondents in subservice area villages. This is being
extended to habitations of 1,000 and above population in North-East and Hilly States
and 1,600 and above population in the rest of the country. However, with the
introduction of Direct Cash Transfers w.e.f. January, 2013 it has become necessary
that comprehensive plan for coverage of the entire country through banking services
to enable Direct Cash Transfer is prepared. Banks were required to ensure that there
is at least one bank branch/ Business Correspondent Agent (BCA) in every Gram
Panchayat(s). Since the population of Gram Panchayat varies across the States, Banks
need to ensure that about 1,000 to 1,500 households are available in the sub-service
area of BCA. In case of North-East, Hilly States and sparsely populated regions of other
States banks decided the households to be covered by each BCA appropriately. In case
of larger Gram Panchayats more than one BCA could be appointed. In case of smaller
Gram Panchayats more than one contiguous Gram Panchayat, taking into
consideration the geographical area, could be assigned to each BCA. In every case,
banks were required to ensure that the Gram Panchayat(s) to be covered by each bank
branch/ BCA is clearly identified as a sub-service area within the service area of the
branch.

1.5.4.3 Preparation of District / State Credit Plans

Planning plays an important role in the implementation of the Lead Bank Scheme. A
bottom-up approach is adopted to map the existing potential for development starting
with preparation and finalisation of i) Potential-linked Credit Plan by DDM of
NABARD and then, ii) District / State Credit Plan by Lead Bank.

Potential-linked Credit Plan (PLP)

PLPs are a step towards decentralised credit planning that take into account the
achievable long term physical potential, availability of infrastructure support,
marketing facilities, achievements during last year and policies/programmes/budgets

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of Govt. departments for next year, and resources available with NGOs and other
agencies. These plans focus on promoting innovative farming systems such as organic
farming, bio dynamic farming, permaculture and sustainable small-scale farming, as
also promoting Farmer Producer Organisations (FPOs) and Farmers’ Markets.

Essentially, the PLPs pass through a series of participative processes, such as pre-PLP
meeting (convened by LDM) attended by all stakeholders to reflect and deliberate
upon their views and concerns regarding sector/activity-wise credit potential and
priorities to be set out for inclusion in the PLP.

District Credit Plan / Annual Action Plan

a) Circulation of block-wise/activity-wise potential contained in PLPs to their

branches by controlling offices of all the banks for preparing the Branch Credit Plans.

b) In the next step, DDM of NABARD and LDM steer through guided discussion of
Branch Credit Plans in a special Block Level Bankers' Committee (BLBC) meeting and
aggregate them into Block Credit Plan.

c) All the Block Credit Plans of the district are aggregated by the LDM to form a District
Credit Plan (DCP). The Zonal/Controlling Offices of banks are duly involved in
finalisation of commitments in the form of DCP.

d) The District Credit Plan is then placed before the DCC for final
acceptance/approval. All the District Credit Plans are eventually aggregated into a
State Level Credit Plan to be prepared by SLBC Convenor Bank.

e) The corporate business targets for branches, blocks, districts and states may be
aligned with the Annual Credit Plans (ACP) and synchronized with their internal
business plans.

1. 5.4.3 Monitoring of LBS by RBI - Revised Mechanism of Data Flow

/ MIS

Data on Annual Credit Plan (ACP) is an important element to review the flow of credit
in the State. ACP formats are aligned with the extant reporting guidelines on priority
sector lending. Reporting statements have been prescribed as under:

I. LBS-MIS-I Statement for ACP target reporting

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 II. LBS-MIS-II Statement for disbursement and outstanding

III. LBS-MIS-III ACP achievement vis-à-vis ACP target

SLBC Convenor Banks / Lead Banks have been advised to prepare the bank group wise
statements LBS MIS I, II and III as per prescribed formats revised by RBI starting
from the financial year 2018-19. These statements, separately for scheduled
commercial banks and other banks like State Cooperative Banks, DCCBs, etc., should
be placed in all DCC and SLBC meetings for meaningful reviews. The data pertaining
to scheduled commercial banks needs to be further grouped into public sector banks,
private sector banks, Regional Rural Banks, Small Finance Banks and Wholly Owned
Subsidiaries (WOS) of Foreign Banks to know the bank group wise position.

The integrity & timeliness of the data submitted by banks for the purpose has been an
issue as a significant portion of this data is manually compiled and entered into the
Data Management Systems of the SLBC Convenor Banks. The relevant data must also
be directly downloadable from the CBS and/ or MIS of the banks with a view to keeping
manual intervention to a minimal level in the process. A procedure has been
prescribed by RBI as under:

Each bank’s CBS should have a provision to generate a branch-wise report

pertaining to all LBS related data/ tables to Excel format including fields/ columns
for District & Block name.
Controlling Offices of the banks would be solely responsible to upload this Excel
file on the SLBC websites. SLBC website would, thus, effectively work as a data
aggregation platform. SLBC websites should have a provision to ‘Import/ Upload’
all the data present in the Excel Sheet on the database of the SLBC website.
The SLBC websites should provide access to LDMs to download district and block
specific data directly from this website thus ensuring integrity and timely
availability of data.

1.5.5 Review and Revamp of the LBS from time to time

Since the introduction of the Lead Bank Scheme in December 1969, several changes
have taken place, especially after 1991. These included increasing liberalisation and
globalisation of the Indian economy and the financial sector. Though rate of growth
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are unprecedented, gaps in growth in agriculture and infrastructure were always
noticed. Several regions of the country and sections of the society lagged in
development. Accordingly, there was a conscious shift towards more inclusive growth
and financial inclusion. In banking, the use of Information Technology (IT) and
intermediaries made it feasible to increase outreach, scale and depth of banking
services at affordable cost. However, during these years, the structure and monitoring
mechanisms under the Lead Bank Scheme have remained more or less static. Other
notable deficiencies are given as under:

The Lead bank Scheme was not fully able to achieve its targets due to shift and
distortions in policies, financial frictions at organizational levels across districts,
complexities in operations and issues shifting to the Financial Inclusion.
LBS Information System did not have any checks and balances and does not agree
with several other existing monitoring returns relating to Priority Sector Credit
Various committees like BLBCs, DCCs and DLRCs seldom functioned with all
seriousness. Major discussions were restricted to monitoring of Govt. sponsored
programmes only and banking needs and prudence took a back seat.
Lack of coordination between various planning hubs became more prominent,
particularly non-synchronisation of Annual Credit Plans prepared by branches,
Annual Action Plans finalised at Lead Bank level and Potential Linked Credit Plan
(PLP) by NABARD. Duplication of efforts in credit plan preparation and reporting
at the district level were visible.

This resulted in creeping in of operational inefficiencies and collective outcry. A strong

need was felt for a comprehensive review and to revitalize the scheme in the changed
scenario with clear guidelines on respecting the bankers’ commercial judgements even
as they fulfil their sectoral targets. Certain attempts initiated at various levels are
described in following paragraphs.

1.5.5.1 Working Group to review LBS, 1981

In pursuance of the recommendations of the Committee to Review Arrangements for

Institutional Credit for Agriculture and Rural Development (CRAFICARD)
(Chairman: Shri B. Sivaraman), the RBI set up a Working Group under the
chairmanship of Shri U. K. Sarma in November 1981 to review the working of Lead
Bank Scheme in all its aspects. The recommendations of the Group, with some
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modifications, were implemented. The major recommendations pertained to:

Reconstitution of the DCCs and Standing Committees to make them effective fora;
Constitution of District Level Review Committees in place of District Level
Review Meetings (DLRMs);
Status, designation and role of the Lead Bank Officer;
Periodicity of DCC, DLRC meetings and their conduct;
Effective management information systems under Lead Bank Scheme;
Training needs on Lead Bank Scheme for all officials up to the block level in
government and officers of rural branches of financing agencies;
Strengthening infrastructure of Lead Bank Offices

1.5.5.2 Usha Thorat Committee on Review of LBS, 2009

Pursuant to the announcement in the mid-term review of Annual Policy for the year
2007-08, a High Level Committee chaired by Smt. Usha Thorat, Deputy Governor,
Reserve Bank of India was constituted by Government of India. Major terms of
reference included exhaustive review of Lead Bank Scheme with focus on financial
inclusion and recent developments in the banking sector; structure and functions of
various committees/fora under the Scheme; role and responsibilities of various
functionaries such as Lead District Officers, LDMs, DDMs of NABARD, etc.; need for
decentralization of norms, systems and procedures to suit local needs covering, inter-
alia, the objectives and scope of the Scheme.

The committee had in-depth interactions with all the stakeholders including banks,
DFIs, State Governments, academicians, marketing experts, MFIs and NGOs. It
submitted its final report on 20th August 2009. The main findings and
recommendations of the Committee were brought out to improve the effectiveness of
the Scheme as under:

The committee recommended the enhancing the scope of the scheme as most
forums to monitor the implementation of LBS were being used for routine review
of the government programmes.
It suggested a sharper focus on facilitating financial inclusion, credit deposit ratio,
recovery performance among others rather than a mere review of the government
sponsored schemes.

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 The role of Private sector banks in LBS action plans, particularly in areas of their
presence, must be enhanced.
Enhancement of the business correspondent model was suggested in order to make
banking services available in all villages having a population of above 2,000,
Relaxation in KYC (Know Your Customer) norms for small value accounts.
It was highly favoured further continuance and revitalization of the LBS to
accelerate financial inclusion in the unbanked areas of the country.

There was an overwhelming consensus that the Scheme needs to continue.

Recommendations were duly taken cognisance of by RBI and suitably modified and
included in its Master Circular on Lead bank Scheme.

1.5.5.3 Committee of Executive Directors set up by RBI

In view of changes that took place in the financial sector over the years, RBI constituted
a “Committee of Executive Directors” of Banks to study the efficacy of the Scheme and
suggest measures for improvement. The Committee’s recommendations were
discussed with various stakeholders and based on their feedback, RBI decided to issue
‘action points’ for implementation by the Lead Banks :

a) Instructions to ensure HR capabilities of LDM, its associated staff and

improvement in available infrastructure with LDM office were issued vide
notification No. RBI/2017-2018/156 dated 06th April 2018.

b) Necessary guidelines for conduct of SLBC meetings were issued by RBI vide
Notification No. RBI/2017-2018/156 dated 06th April 2018. Besides other
operational issues, guidelines highlighted certain issues as :

SLBC meetings should be participated only by the senior functionaries of the

banks/ Government Departments like MD/CEO/ED of Convenor Bank, Regional
Director of the RBI and Additional Chief Secretary / Development Commissioner
of the State concerned.
Core agenda of SLBC should primarily focus on policy issues and routine issues
may be delegated to sub-committee(s) of the SLBC. An illustrative revised Agenda
was indicated in the circular.
Similarly on above lines, agenda of DCC and BLBCs should be properly prioritised.
BLBC forum should be specifically strengthened.
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 Data Management Systems of the SLBC Convener Banks should be upgraded,
modified and aligned with revised LBS formats for streamlined MIS keeping
manual intervention to a minimal level.

1.5.6 Let us Sum-Up

The genesis of Lead Bank Scheme can be traced to the Study Group, headed by Prof.
D.R. Gadgil (Gadgil Study Group) on the Organizational Framework for the
Implementation of the Social Objectives, which submitted its report in October 1969.
The Scheme emphasized making specific banks in each district as the key instruments
of local development by entrusting them with the responsibility of locating growth
centres, assessing deposit potential, identifying credit gaps and evolving a coordinated
approach to credit deployment in each district, in concert with other banks and credit
agencies. The Scheme, significantly, did not envisage a monopoly of banking business
by the Lead Bank in the district. Various fora have been created at the block level,
district level and the State level, under the Lead Bank Scheme for co-ordination of
activities of commercial banks and other financing agencies on the one hand and
Government departments on the other.

1.5.7 Check Your Progress

1. Under LBS and adoption of its ‘Area Approach’, a ____________ was taken as a
unit for planning as most statistical and other data were available at that level.

a) Village b) Panchayat

c) District d) Block

2. A Study Group was appointed in October 1968 under the leadership of ________
on the ‘Organizational Framework for the Implementation of Social Objectives’ in
pursuance of a decision of the National Credit Council.

a) Prof. D. R. Gadgil b) Dr. M.S. Swaminathan

c) Dr. M. Narasimham d) Dr. Raghuram Rajan

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3. Which of the following dignitaries was NOT associated with formulation of LBS?

a) Shri U. K. Sarma b) Shri F. K. F. Nariman

c) Smt. Usha Thorat d) Dr. C. Rangarajan

4. What is full form of LDM?

a) Lead Development Manager b) Lead District Manager

c) Lead Divisional Manager d) Lead Diligent Manager

5. Which of the following is NOT a forum under Lead Bank Scheme?

a) Block Level Banker's Committee b) DCC

d) District Development and Monitoring

c) DLRC
Committee

6. Service Area Approach to Rural Lending was initially introduced under Lead Bank
Scheme with effect from _________.

a) April 1, 1989 b) April 1, 1979

c) July 1, 1989 d) July 1, 1979

7. Under District Credit Planning Exercise, Potential-linked Credit Plan (PLP) is

prepared by _______.

a) LDM from Lead Bank b) DDM from NABARD

c) Financial Advisor of DC / DM d) Chief Agriculture Officer

8. Usha Thorat Committee on Review of LBS, 2009 was set-up by ______.

b) State Level Banker's Committee from

a) Reserve Bank of India Maharashtra

c) Government of India d) Government of Maharashtra

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9. Which of the following was NOT a recommendation of Usha Thorat Committee on
Review of Lead Bank Scheme?

a) Enhancing functional scope of Lead Bank Scheme

b) Role of Private Banks to be increased in LBS

c) Focus on facilitating Financial Inclusion

d) Service Area allocation to be abolished

10. District Credit Plan (DCP) prepared by LDM is put up for approval to :

a) BLBC - then DCC - then SLBC b) DCC - then SLBC

c) Put up to DCC d) Put up to SLBC

Answer Key:

1: c 2: a 3: d 4: b 5: d

6: a 7: b 8: c 9: d 10: c

1.5.8 References for Further Reading

IIBF, Mumbai: “General Bank Management”, Macmillan Publication

IIBF, Mumbai: “Rural Banking”, Taxmann

RBI (01st April 2021): Master Circular on “Lead Bank Scheme”, RBI/2021-22/04
available on RBI Website www.rbi.org.in

Report of High Level Committee to Review the Lead Bank Scheme, 2009: Headed by
Smt. Usha Thorat, Former Deputy Governor, RBI

Samarth Gupta (2019): “Distortion in Credit Availability in India's Lead Bank Scheme
: A Transaction Costs-based approach”, NCAER, June 2019

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 Unit 02: Organizational Behaviour

Lesson No. 01 Individuals and Organisations

Lesson No. 02 Communication

Lesson No. 03 Personality

Lesson No. 04 Inter-Personal Relationship

Lesson No. 05 Motivation

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Lesson No. 01: Individuals and Organisations

2.1.1 Introduction

2.1.2 Behaviour Analysis at Different Levels

2.1.2.1 Individual Level of Analysis

2.1.2.2 Group Level of Analysis

2.1.2.3 Organisational Level of Analysis

2.1.3 Causes of Individual Behaviour

2.1.4 Factors influencing an individual’s attitude

2.1.4.1 Abilities

2.1.4.2 Gender

2.1.4.3 Race and Culture

2.1.4.4 Attribution

2.1.4.5 Attitude

2.1.4.6 Perception

2.1.5 Characteristics of the perceiver

2.1.6 Application of Perception in Management

2.1.7 Impacts of Perception in the Organization

2.1.8 Let us Sum-Up

2.1.9 Check Your Progress

2.1.10 References for Further Reading

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2.1.1 Introduction

Organizational behaviour is the study of both group and individual performance and
activity within an enterprise or an organization. Organizational behaviour
researchers study the behaviour of individuals primarily in their organizational roles.
One of the main goals of organizational behavior is "to revitalize organizational theory
and develop a better conceptualization of organizational life".

This area of study examines human behaviour in a work environment and

determines its impact on job structure, performance, communication, motivation,
leadership and decision making abilities, etc.

2.1.2 Behaviour Analysis at Different Levels

Behaviour as an individual or in a group is always analysed by everyone in the

organization. It is analysed at three different levels −

 Individual level of analysis

 Group level of analysis
 Organizational level of analysis

2.1.2.1 Individual Level of Analysis

At this level of analysis, organizational behaviour includes the study of learning,

perception, creativity, motivation, and personality. Organizational behaviour, at this
level of analysis massively draws upon psychology, engineering and medicine. It
includes the study of turnover, task performance and evaluation, coordinated
behaviour, deviant work behaviour, ethics and cognition. For example − Ram joins a
company as an intern and is very open to learning new things but as time passes and
he gets promoted his attitude towards his interns becomes rude. This is a fine example
of individual level of analysis.

2.1.2.2 Group Level of Analysis

Organizational behaviour, at this level of analysis, draws upon the sociological and
socio-psychological discipline. At this level of analysis, organizational behaviour
includes the study of group gesture, intra-group and intergroup dispute and

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attachment. It is further extended to the study of leadership, power, norms,
interpersonal communication, networks and roles. An example of this level of analysis
− Board of directors of company X decide to give bonus to their workers as they have
really worked hard on a certain project.

2.1.2.3 Organizational Level of Analysis

Organizational behaviour, at this level of analysis draws upon sociology and political
science. At this level of analysis, organizational behaviour includes the study of
organizational culture, structure, cultural diversity, inter-organizational cooperation
and coordination. Fred Luthans defines that organizational behaviour is to
understand, predicting and controlling human behaviour at work only.

2.1.3 Causes of Individual Behaviour

Certain individual characteristics are responsible for the way a person behaves in
daily life situations as well as reacts to any emergency situations. These
characteristics are categorized as Inherited and Learned characteristics.

Inherited Characteristics: The features individuals acquire from their parents or

from our forefathers are the inherited characteristics. In other words, the gifted
features an individual possesses by birth are inherited characteristics. For example:
colour of a person’s eye; religion/race of a person; shape of the nose or earlobes, etc.

Learned Characteristics: Nobody learns everything by birth. First our school is

our home, then our society followed by our educational institutions. The
characteristics an individual acquires by observing, practicing and learning from
others and the surroundings is known as learned characteristics.

It consists of the following features −

Perception − Result of different senses like feeling, hearing, etc.

Values − Influences perception of a situation, decision making process

Personality − Patterns of thinking, feeling, understanding and behaving

Attitude − Positive or negative attitude like expressing one’s thought

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2.1.4 Factors influencing an individual’s attitude

An individual is influenced by various factors in his personal as well as social life. We

never think about these factors and how they affect our daily life but we can’t ignore
the fact that they are responsible for the way we walk, talk, eat, socialize, etc. Major
elements that imprints a person’s behaviour inside and outside of the organization
are given below: −

2.1.4.1 Abilities

Abilities are the traits a person learns from the environment around as well as the
traits a person is gifted with by birth. In order to understand how these affect a
person’s behaviour, we need to know what these abilities or traits are:

 Intellectual abilities − It personifies a person’s intelligence, verbal and

analytical reasoning abilities, memory as well as verbal comprehension.

 Physical abilities − It personifies a person’s physical strength, stamina, body

coordination as well as motor skills.

 Self-awareness abilities − It symbolizes how a person feels about the task,

while a manager’s perception of his abilities decides the kind of work that needs to
be allotted to an individual.

Thus, the psychological, physical, self-assurance traits owned by a person define the
behaviour of a person in social and personal life. For ex: ‘A’ has a high IQ level,
whereas ‘B’ can lift a bike and is a strong guy.

2.1.4.2 Gender

Research proves that men and women both stand equal in terms of job performance
and mental abilities; however, society still emphasizes differences between the two
genders. Absenteeism is one area in an organization where differences are found as
women are considered to be the primary caregiver for children. A factor that might
influence work allocation and evaluation in an organization is the manager’s
perception and personal values.

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2.1.4.3 Race & Culture

Race is a group of people sharing similar physical features. It is used to define types
of persons according to perceived traits. For example − Pathans, African. On the other
hand, culture can be defined as the traits, ideas, customs and traditions one follows
either as a person or in a group. For example − Celebrating a festival.

Race & culture have always exerted an important influence on an individual’s

behaviour both at the workplace as well as in the society. In today’s diverse work
culture, the management as well as staff should learn and accept different cultures,
values, and common protocols to create more comfortable corporate culture.

2.1.4.4 Attribution

It is the course of observing behaviour followed by determining its cause based on

individual’s personality or situation. It is all about how an individual behaves in
different situations. Attribution framework uses the following three criteria −

 Consensus − the extent to which people in same situation might react similarly

 Distinctiveness − the extent to which a person’s behaviour can be associated to

situations or personality

 Consistency − the frequency measurement of the observed behaviour, that is,

how often does this behaviour occur

For example – ‘A’ invites ‘B’ and two more friends for a movie and they agree to bunk
and watch the movie, this is consensus. Bunking of class says that they are not
interested in their lectures, this is distinctiveness. A little change in the situation, like
if ‘A’ frequently starts bunking the class, then his friends may or may not support him.
The frequency of their support and their rejection decides consistency.

2.1.4.5 Attitude

It is the abstract learnt reaction or say response of a person’s entire cognitive process
over a time span. For example − A person who has worked with different companies
might develop an attitude of indifference towards organizational citizenship.

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2.1.4.6 Perception

Perception is an intellectual process of acquiring, interpreting, selecting and

organizing sensory information. It transforms sensory stimuli into meaningful
information. It is the process of interpreting something that we see or hear or react in
our mind and use it later to judge and give a verdict on a situation, person, group, etc.
People’s behavior is based on their perception of what reality is, not on reality itself.
Perception is a process in which all people take part in as we move through the course
of events in our daily lives. When we meet people, make business decisions, evaluate
performances, or pass judgments, our perception surrounding such events help
persuade our next course of direction (Goldstein, 2006). In a sense, perception,
accurate or flawed, is our reality. Robbins (2005) defines perception as a process that
individuals go through, influenced by surrounding stimuli and sensory impressions,
to define their surrounding environment. Causes that shape or distort our perceptions
have a tremendous effect on the impact of an organization's behavior. Individuals, by
nature, develop perceptive shortcuts when passing judgment and inflect both positive
and negative effects. In exploring perception, we can see how decisions are made in
organizations and how these perceptions shape ethical and moral decisions.

It can be divided into six types namely −

 Of sound − The ability to receive sound by identifying vibrations

 Of speech − The competence of interpreting and understanding the sounds of

language heard

 Touch − Identifying objects through patterns of its surface by touching it

 Taste − The ability to detect flavour of substances by tasting it through sensory

organs known as taste buds

 Other senses − Other senses include balance, acceleration, pain, time,

sensation felt in throat and lungs, etc.

 Of the social world − It permits people to understand other individuals and

groups of their social world

All perceptions of above types are important, but in the behavior of individuals in an
organization, seeing, hearing and feelings – are the dominant senses. People process

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information inputs into decisions and actions through perception. It is a way of
forming impressions about oneself and other people and daily life experience. It is also
a screen through which information passes before having an effect on people.

2.1.5 Characteristics of the perceiver

Several characteristics of the perceiver can affect perception. When an individual looks
at a target and attempts to interpret what he or she stands for, that interpretation is
heavily influenced by personal characteristics of the individual perceiver. The major
characteristics of the perceiver influencing perception are:

a) Attitudes: The perceiver's attitudes affect perception. For example, Mr. X is

interviewing candidates for a very important position in his/her organization - a
position that requires negotiating contracts with suppliers, most of whom are male.
Mr. X may feel that women are not capable of holding their own in tough negotiations.
This attitude without any doubt affects his/her perceptions of the female candidates
he interviews.

b) Moods: Moods can have a strong influence on the way we perceive someone. We
think differently when we are happy than we do when we are depressed. In addition,
we remember information that is consistent with our mood state better than
information that is inconsistent with our mood state. When in a positive mood, we
form more positive impressions of others. When in a negative mood, we tend to
evaluate others unfavorably.

c) Motives: Unsatisfied needs or motives stimulate individuals and may exert a

strong influence on their perceptions. For example, in an organizational context, a
boss who is insecure perceives a subordinate's efforts to do an outstanding job as a
threat to his or her own position. Personal insecurity can be translated into the
perception that others are out to "get my job", regardless of the intention of the
subordinates.

d) Self - Concept: Another factor that can affect social perception is the perceiver’s
self-concept. An individual with a positive self-concept tends to notice positive
attributes in another person. In contrast, a negative self-concept can lead a perceiver
to pick out negative traits in another person. Greater understanding of self allows us
to have more accurate perceptions of others.

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e) Interest: The focus of our attention appears to be influenced by our interests
because our individual interests differ considerably. What one person notices in a
situation can differ from what others perceive. For example, the supervisor who has
just been reprimanded by his/her boss for coming late, is more likely to notice his/her
colleagues coming late the next day than he/she did last week.

f) Cognitive structure: Cognitive structure, an individual's pattern of thinking, also

affects perception. Some people have a tendency to perceive physical traits, such as
height, weight and appearance, more readily. Cognitive complexity allows a person to
perceive multiple characteristics of another person rather than attending to just a few.

g) Expectations: Finally, expectations can distort your perceptions in that you will
see what you expect to see.

The research findings of the study conducted by Sheldon S Zalking and Timothy W
Costello on some specific characteristics of the perceiver reveal:

 Knowing oneself makes it easier to see others accurately.

 One's own characteristics affect the characteristics one is likely to see in others.

 People who accept themselves are more likely to be able to see favorable aspects
of other people.

 Accuracy in perceiving others is not a single skill.

These four characteristics greatly influence how a person perceives other in the
environmental situation.

2.1.6 Application of perception in management

If the manager has good perception in any department of the organization, the
department team will have safe solutions with risky ideas to find innovative
solutions for the problem, to leverage creativity and motivate the higher plateau of
thinking. With the help of perception, habits and attitudes will get changed. With the
help of perception, we can find solutions to the most difficult problems. Perception is
a method by which persons arrange and interpret their sensory thought to give
meaning to their surroundings. Perception plays a very important role in an
organization. In organizations, actions of people are based on their perception of what
truth is, not on the truth itself. Their decision might be biased or might be taken under
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pressure. For example: Assessment of worker’s effort is a judgment subject to
perceptual bias. Its reason is that perception affects the organizational process
because if the employees cannot perceive the goal or the aim of
the organization properly , then they might not be working towards it either and if they
are not working towards it then that organization faces a gap between what is required
of the people and what is actually being done.

The "change process" that happens frequently in organizations, is very important for
the employees to know what the organization is going to go through and what is going
to happen after the process. If their perception isn't clear about it then they might
resist the change a lot which isn't good for the company. The employees' perception
can help in company's organizational process. It can run smoother or become difficult.
Each and every person whether he/she is in the organization or outside the
organization has different perception or cognition about the same thing.

2.1.7 Impacts of perception in the organization

People in the organization always judge each other. The manager or head of
department must appraise and evaluate the performance of his/her subordinates
through perception.

(a) Conducting an Interview:

The decision that who is to be selected and who is to be rejected depends upon the
perception of the interviewer. Different types of perceptual tests are taken of the
candidates and are judged from different angles.

(b) Performance Evaluation:

Candidate is evaluated on the basis of perception. If the manager thinks and perceives
that the employee is performing very well then he/she is rewarded with monetary and
non-monetary incentives as well as promotion.

(c) Employee's Loyalty:

The loyalty of the employees can be judged through the process of perception. If the
employee is looking for further opportunities outside the organization, then he/she
may be labeled disloyal and in result the manager cuts off further promotion or any
other reward for that employee.

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2.1.8 Let us Sum-Up

There is a known fact that without perception nothing can be done in an organization
and for doing any task we need a perception which is accepted by all the employees in
an organization. Perception is the process of acquiring, interpreting, selecting and
organizing sensory information. Perception is the way, we react for any particular
situation. Perception includes all those processes by which an individual receives
information about his/her environment – seeing, hearing, feeling, testing and
smelling. Attribution theory is concerned with how and why ordinary people explain
events as they do. If the manager has good perception in any department of the
organization, the department team will have safe solutions with risky ideas to find
innovative solutions for the problem, to leverage creativity and motivate the higher
plateau of thinking.

2.1.9 Check Your Progress

1. ___________ is a study of individual behaviour, whereas ________

is a study of group behaviour.

a) Anthropology, Sociology b) Psychology, Sociology

c) Psychology, Political science d) Physiology, Sociology

2. Organisational Behaviour helps to understand behaviour of human in

______ .

a) Work place and Society b) Society only

c) Work place only d) Department only

3. Which one of the following is the definition given by Fred Luthans?

a) Organisational behaviour is to understand, predicting and controlling human

behaviour at work
b) Organisational behaviour is subset of management activities concerned to
human behaviour
c) Organisational behaviour is a branch of social sciences that seeks to build
theories
d) Organisational behaviour is a field of study that investigates the impact on
behaviour

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4. Behaviour is analysed at three levels:

a) Individuals, Organisation, Society b) Society, Organisation, Nation

c) Employee, Employer, Management d) Individual, Groups, Organisation

5. Perceptions are affected by:

a) Moods b) Attitude
c) Motives d) All of the above

6. The research findings of the study conducted by Sheldon S Zalking and Timothy W
Costello on some specific characteristics of the perceiver reveal:

a) Motivation plays an important role in perceptual selectivity

b) Knowing oneself makes it easier to see others accurately
c) A tendency to group several stimuli together into a recognizable pattern
d) The larger the object, the more likely it will be perceived

Answer Key:

1: b 2: c 3: a 4: d 5: d

6: b

2.1.10 References for Further Reading

Bruce Goldstein E. and James R. Brockmole (2017): “Sensation and Perception), 10th
Edition, Publishers: Cengage Learning

Kimberly D. Elsbach (2007): “Organizational Perception Management”, Publishers:

Psychology Press

Kuo Jason and Naoi Megumi (2015): “Individual Attitudes”, Publishers: Oxford
University Press

Stangor Dr. Charles (2014): “Principles of Social Psychology” – 1st International

Edition, Publishers: BCcampus Open Education

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Warner Melissa (2015): “Individual Attitudes and Behaviors”, Adapted from
“Organizational Behaviour” – Chapter 04, Publisher: University of Minnesota
Libraries Publishing

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Lesson No. 02: Communication

2.2.1 Introduction

2.2.2 What is Communication?

2.2.3 Types of Communication

2.2.3.1 Verbal Communication

2.2.3.2Non-Verbal Communication

2.2.3.3Written Communication

2.2.3.4Visual Communication

2.2.4 Process of Communication

2.2.5 Barriers to Communication

2.2.5.1 Semantic Barriers

2.2.5.2Psychological Barriers

2.2.5.3Organizational Barriers

2.2.5.4Personal Barriers

2.2.6 Skills for Effective Communication

2.2.7 Let us Sum-Up

2.2.8 Check Your Progress

2.2.9 References for Further Reading

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2.2.1 Introduction

Communications is fundamental to the existence and survival of humans as well as to

an organization. Being able to communicate effectively is perhaps the most important
of all life skills. It is what enables us to pass information to other people, and to
understand what is said to us. It is more than simply the transmission of information.
The term requires an element of success in transmitting or imparting a message,
whether information, ideas or emotions. It is a process of creating and sharing ideas,
information, views, facts, feelings, etc. among the people to reach a common
understanding. Proper workplace communication has many benefits. More
specifically, it enables organizations to become more agile and achieve better
workplace alignment.

2.2.2 What is Communication?

The word ‘communication’, refers to a process by which something is made common

or shared. The transition from impulse to communicate to the comprehension of
communication is a crucial passage. Communication is a dynamic process and how
we communicate can positively and negatively affect the relationships in our work and
life. There are many definitions of communication: –

“Imparting or exchanging of information by speaking, writing or using some other

medium” and “means of sending or receiving information, such as telephone lines
or computers.” ~ Google
“Act or process of using words, sounds, signs, or behaviour to express or exchange
information or to express your ideas, thoughts, feelings, etc., to someone else” ~
Merriam-Webster Dictionary
“Exchange of thoughts, messages or information, as by speech, signals, writing or
behaviour” ~ The Free Dictionary
“Act or an instance of communicating; the imparting or exchange of information,
ideas, or feelings” ~ Collins Dictionary
“Imparting or exchanging of information by speaking, writing, or using some other
medium”~ Oxford Dictionary

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2.2.3 Types of Communication

Different ways in which information is usually shared with one another can be divided
in four main categories:

2.2.3.1 Verbal Communication

Verbal communication is the most common use of language to transfer information

through speaking or sign language during presentations, video conferences and phone
calls, meetings and one-on-one conversations.

Steps to be taken care of in order to develop verbal communication skills:

Use a strong, confident speaking voice. Especially when presenting

information to a few or a group of people, be sure to use a strong voice so that
everyone can easily hear you. Be confident when speaking so that your ideas
are clear and easy for others to understand.
Use active listening. The other side of using verbal communication is
intently listening to and hearing others. Active listening skills are key when
conducting a meeting, presentation or even when participating in a one-on-one
conversation.
Avoid filler words. It can be tempting, especially during a presentation, to
use filler words such as “um,” “like,” “so” or “yeah.” While it might feel natural
after completing a sentence or pausing to collect one’s thoughts, it can also be
distracting for the audience. Try presenting to a trusted friend who can point
out the times we use filler words; rather replace them by taking a breath.

2.2.3.2 Non-verbal Communication

Nonverbal communication is the use of body language, gestures and facial expressions
to convey information to others. It can be used both intentionally and unintentionally.
For example, you might smile unintentionally when you hear a pleasing or enjoyable
idea or piece of information. Nonverbal communication is helpful when trying to
understand others’ thoughts and feelings. Displaying “closed” body language, such as
crossed arms or hunched shoulders, portray us feeling anxious, angry or nervous.
Whereas “open” body language with both feet on the floor and arms by their side or on
the table, indicate our positivity and openness to information.
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Steps to be taken care of in order to develop nonverbal communication skills:

Notice how our emotions feel physically. Different range of emotions,

being energized, bored, and happy or frustrated, may cause specific symptoms
within our body. For example, if we are feeling anxious, our stomach might feel
tight. Developing self-awareness around how our emotions affect our body can
give us greater mastery over our external presentation.
Be intentional about nonverbal communications. Make an effort to
display positive body language when you feel alert, open and positive about
your surroundings. Body language may be used to support verbal
communication such as asking questions or pulling someone aside to give some
feedback.
Mimic nonverbal communications you find effective. If we find certain
facial expressions or body language beneficial to a certain setting, learn, it must
be used in future appropriate settings as a guide.

2.2.3.3 Written Communication

Written communication is the act of writing, typing or printing symbols like letters
and numbers to convey information. It provides a record of information for reference.
Writing is commonly used to share information through books, pamphlets, blogs,
letters, memos and more. Emails and chats are a common form of written
communication in a workplace.

Steps to be taken care of in order to develop written communication skills:

Strive for simplicity. Written communications should be as simple and clear as

possible. While it might be helpful to include lots of detail in instructional
communications, for example, you should look for areas where you can write as
clearly as possible for your audience to understand.
Don’t rely on tone. Since there is no nuance of verbal and nonverbal
communications, be careful when you are trying to communicate a certain tone
when writing. For example, attempting to communicate a joke, sarcasm or
excitement might be translated differently depending on the audience. Instead, try
to keep your writing as simple and plain as possible and within etiquetted circle.

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 Take time to review your written communications. Setting time aside to re-
read emails, letters or memos can help us identify mistakes, tones or opportunities
to say something differently. A third party evaluation or review of important
communications by a trusted colleague will always be ideal.
Keep a file or record of effective or enjoyable writing. If you receive a
certain pamphlet, email or memo that you find particularly helpful or interesting,
save it for reference when writing your own communications. Own writings can
also be kept for record and future reference.

2.2.3.4 Visual Communication

Visual communication is the act of using photographs, art, drawings, sketches, charts
and graphs to convey information. Visuals are often used as an aid during
presentations to provide helpful context alongside written and/or verbal
communication. Because people have different learning styles, visual communication
might be more helpful for some to consume ideas and information. Generally visual
aid gather more attention from audience.

Steps to be taken care of in order to develop visual communication skills:

Ask others before including visuals. If you are considering sharing a visual aid
in your presentation or email, consider asking others for feedback. Adding visuals
can sometimes make concepts confusing or muddled. Getting a third-party
perspective can help you decide whether the visual adds value to your
communications.
Consider your audience. Be sure to include visuals that are easily understood by
your audience. For example, if you are displaying a chart with unfamiliar data, be
sure to take time and explain what is happening in the visual and how it relates to
what you are saying. You should never use sensitive, offensive, violent or graphic
visuals in any form.

2.2.4 Process of Communication

Communication is a process of two or more people transacting with one another about
their understanding or perspective about reality, situation, people, experience, etc.
This process goes on until both have said what they wanted to say and have understood

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each other. Communication is essentially the transfer of ideas, messages or
information from one person to another. It is effective when it gets the desired action
or response. Basic communication skills are essential for continued success,
whether personal or professional.

Stage 01: Conceiving the message involuntarily or as a result of an impulse or after

careful process of reasoning.

Stage 02: Encoding the message in an appropriate language which may be a spoken
word or written word or number or non-verbal mode like picture, drawing, symbol,
diagram, signs and gesture.

Stage 03: Selecting communication medium through which to transmit the message.

Stage 04: Decoding the message before absorption and action.

Stage 05: Interpreting the message correctly lest it lead to misunderstanding and
even total breakdown of communication.

Stage 06: Providing feedback that is a reaction or response to message. Feedback

helps to keep communication open and free flowing.

2.2.5 Barriers to communication

The communication barriers may prevent communication or carry incorrect meaning

due to which misunderstandings may be created. Therefore, it is essential for a
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manager to identify such barriers and take appropriate measures to overcome them.
The barriers to communication in organizations can be broadly grouped as follows:

2.2.5.1 Semantic Barriers

These are concerned with the problems and obstructions in the process of encoding
and decoding of a message into words or impressions. Normally, such barriers result
due to use of wrong words, faulty translations, different interpretations, etc.

For example, a manager has to communicate with workers who have no knowledge of
the English language and on the other side, he is not well conversant with the Hindi
language. Here, language is a barrier to communication as the manager may not be
able to communicate properly with the workers.

2.2.5.2 Psychological Barriers

Emotional or psychological factors also act as barriers to communication. The state of

mind of both sender and receiver of communication reflects in effective
communication. A worried person cannot communicate properly and an angry
recipient cannot understand the message properly.

Thus, at the time of communication, both the sender and the receiver need to be
psychologically sound. Also, they should trust each other. If they do not believe each
other, they cannot understand each other’s message in its original sense.

2.2.5.3 Organizational Barriers

The factors related to organizational structure, rules and regulations authority

relationships, etc. may sometimes act as barriers to effective communication. In an
organization with a highly centralized pattern, people may not be encouraged to have
free communication. Also, rigid rules and regulations and cumbersome procedures
may also become a hurdle to communication.

2.2.5.4 Personal Barriers

The personal factors of both sender and receiver may act as a barrier to effective
communication. If a superior thinks that a particular communication may adversely
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affect his authority, he may suppress such communication.

Also, if the superiors do not have confidence in the competency of their subordinates,
they may not ask for their advice. The subordinates may not be willing to offer useful
suggestions in the absence of any reward or appreciation for a good suggestion.

2.2.6 Skills for Effective Communication

Effective communication doesn’t happen overnight, it is a skill that has to be cultivated

and nurtured. Below are some skills that can be practiced to build on or develop
communication skills.

2.2.6.1 Active Listening – Some ways to actively listen include: listen twice as
much as you speak; listen with your whole body; be alert and interested in the other
person; refrain from interrupting and reflecting back what you have heard.
Remember – “The most basic of all human needs is the need to understand and be
understood.

2.2.6.2 Non-Verbal Communication – We transmit information using words,

gestures and body language, subsequently active listening also involves non-verbal
communication. Examples of non-verbal signals include tone of voice, eye contact,
facial expressions, silence and hand, arm and leg postures.

2.2.6.3 Asking Questions – When you are in conversation with someone, asking
questions shows you are interested in them. There are many types of questions you
can ask including – open (i.e. questions that start with What and How), closed (i.e.
questions that start with Did, Do, Would, Will, Should, Could, Have, Must and Is),
specific (e.g. questions that are specific can start with When, Where, Who, Which, How
much, How many and How often) or visionary (e.g. what are your dreams).

2.2.6.4 Being Clear and Succinct – When you are speaking, be clear, articulate
and concise. Less is more when it comes to speaking and speak plain English.

2.2.6.5 Clarifying and Summarising – To ensure that you are hearing correctly
you can reflect back to clarify what you have heard and again summarise it. This shows
you are listening to the other person and also checks you have the message correct that
they are trying to get across.

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2.2.6.6 Being Empathetic – Having empathy for another person is the ability to
understand and share the feelings of another.

2.2.6.7 Providing Feedback – It doesn’t matter whether you are giving or receiving
feedback, the feedback process is a vulnerable place to be.

2.2.6.8 Developing Trust and Rapport – “The glory of friendship is not the
outstretched hand, not the kindly smile, nor the joy of companionship; it is the
spiritual inspiration that comes to one when you discover that someone else believes
in you and is willing to trust you with a friendship” - Ralph Waldo Emerson.

2.2.6.9 Being Present – Being present links to many of the above skills. Some of
the words that relate to being present include being accepting of the other person you
are communicating with, allowing life to be as it is, cultivating compassion and having
a beginners mind.

2.2.7 Let us Sum-Up

Communication is fundamental to human existence. It is a continuous process and

essential to all human activity. The word ‘communication’, refers to a process by which
something is made common or shared. Good organization is a group of people and
communication amongst them makes the group cohesive and well knit. Such groups
function as effective teams. Communication is a transaction, an exchange of views
between two people. The sender and receiver constantly share in the act of encoding
and decoding and each person affects the other. No matter how good and effective a
communicator one maybe, yet the fact is that one does face certain barriers, from time
to time, which forces them to work on becoming even more effective in their skills to
communicate.

2.2.8 Check Your Progress

1. Communication is a non-stop _________.

a) Paper b) Process
c) Programme d) Plan

2. You need to apply for leave at work? Which method of communication will
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you use?

a) Poster b) Newsletter
c) E-mail d) Blog

3. What are the types of words we should use for verbal communication?

a) Acronyms b) Simple
c) Jargons d) Technical

4. Which of these is NOT an appropriate non-verbal communication at work?

a) Hands in pockets while talking b) Talking at moderate speed

c) Sitting straight d) Tilting head a bit to listen

5. The _______________ is the person who transmits the message.

a) Receiver b) Driver
c) Sender d) Cleaner

6. __________ is the person who notices and decodes and attaches some meaning
to a message.

a) Receiver b) Driver
c) Sender d) Cleaner

7. Which of these is NOT a common communication barrier?

a) Linguistic barrier b) Interpersonal barrier

c) Financial barrier d) Organisational barrier

8. Which of these should not be avoided for effective communication?

a) Noise b) Planning
c) Semantic problems d) Wrong assumptions

9. __________ are problems arising from expression.

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 a) Cultural barriers b) Semantic problems
c) Wrong assumptions d) Selecting perception

10. In which of these problems, is the actual message lost in the abundance of
transmitted information?

a) Selecting perception b) Filtering

c) Under communication d) Over communication

11. When is the communication process complete?

a) When the sender transmits the message

b) When the message enters the channel
c) When the message leaves the channel
d) When the receiver understands the message

12. Language barrier is known as _______.

a) Semantic Barrier b) Emotional Barrier

c) Physical Barrier d) Cultural Barrier

13. _________ means to facilitate understanding of the message.

a) Encoding b) Decoding
c) Receiver d) Feedback

14. Which quality should a Receiver have in communication process?

a) Ability to transmit b) Ability to interpret

c) Ability to decode d) All the above

15. Which of the following is NOT a type of barrier to communication?

a) Organisational barriers b) Physical barriers

c) Lateral barriers d) Cultural barriers

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 Answer Key:

1: b 2: c 3: b 4: a 5: c

6: a 7: c 8: b 9: b 10: d

11: d 12: a 13: b 14: d 15: c

2.2.9 References for Further Reading

Dust Fred (2020) : “Making Conversation: Seven Essential Elements of Meaningful

Communication, Publishers : Harper Business

FitzPatrick Liam and Valskov Klavs (2014) : “Internal Communications: A Manual

for Practitioners”, 1st edition, Publishers : Kogan Page

Leal Bento C. (2017) : “Essential Keys to Effective Communication”, Publishers :

CreateSpace Independent Publishing Platform

Rani Padma and Agrawal Binod C. (2021) : “India Communication Policy and
Strategy for Development, Publishers : Concept Publishing Company Pvt. Ltd.

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Lesson No. 03: Personality

2.3.1 Personality - Concept

2.3.2 Determinants of Personality

2.3.2.1 Biological

2.3.2.2 Environmental

2.3.2.3 Situational

2.3.3 Characteristics of Personality

2.3.4 Development of Personality

2.3.4.1 Type Theories

2.3.4.2 Trait Theories

2.3.4.3 Psychodynamic Theories

2.3.4.4 Behaviour Theories

2.3.4.5 Humanist Theories

2.3.5 Common Traits That Make a Good Character

2.3.6 Role Efficacy in Employment

2.3.6.1 Role Making

2.3.6.1 Role Centering

2.3.6.1 Role Linkage

2.3.7 Let us Sum-Up

2.3.8 Check Your Progress

2.3.9 References for Further Reading

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2.3.1 Personality – Concept

The word personality itself stems from the Latin word persona, which refers to a
theatrical mask worn by performers in order to either project different roles or disguise
their identities. Personality is the deeply ingrained and relatively enduring patterns of
thoughts, feelings, and behaviors that make a person unique - the characteristics that
makes one stand out in a crowd. Personality embraces moods, attitudes and opinions
and is most clearly expressed in interactions with other people. When we talk about
personality, we usually refer to the totality or whole of the person.

Basically, according to experts through the ages, a person's personality is developed

through the intermingling of hereditary and environmental factors. As a child grows,
hereditary tends to play a smaller role, and the environment with the experiences
thrown in contributes to the continuous process of personality development. While
classes and training programs can help one grow and develop each day, yet one can
actually climb the personality ladder by being aware of the self.

A definition given by American psychologists Randy Larsen and David Buss, goes like:
“personality is a stable, organized collection of psychological traits and mechanisms in
the human being that influences his or her interactions with and modifications to the
psychological, social and physical environment surrounding them."

According to Gordon Allport, personality is “the dynamic organization within the

individual of those psychological systems that determine his unique adjustments to
his environment.”

2.3.2 Determinants of Personality

Different theories propose different factors that determine an individual personality.

The most popular research work done by Freud deals with the identification of self-
concept. The major determinants of personality are heredity, environment and
situation.

2.3.2.1 Determinant #1 – Biological

i) Heredity is the transmission of qualities from ancestor to descendent through, a

mechanism lying primarily in the genes. The arrangement and structure of genes that

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are located in the chromosomes is passed around 20% to 50% from one generation to
another. It means the transmission of the qualities such as physical stature, facial
attractiveness, sex, temperament, muscle composition, reflexes, etc. from the
ancestors and parents to the descendants. The studies reveal that twins though
brought up in different places exhibit similar characters. Heredity is generally more
important in determining a person’s temperament than his values and ideals.

ii) Brain: There is a general feeling that brain plays an important role in the
development of one’s personality. However, no conclusive proof is available so far
about the nature of relationship between the brain and personality.

iii) Physical features: An individual’s external appearance may have a

tremendous effect on his personality. Such factors include height, weight, colour, facial
features, etc. of the individual.

2.3.2.2 Determinant #2 – Environmental

Environment refers to the surroundings in which the individuals are brought up. The
environmental factors relating to the formation of personality includes culture, family,
society upbringing and experiences. Family environment refers to the individual’s
upbringing, the social and economic status the family holds and the size of the family.
The society makes an individual to play different roles thus shaping his/her their
personality. Environment tends to strengthen or weaken hereditary traits.

2.3.2.3 Determinant #3 – Situational

Situation has an effect both on environment and heredity. Situation demands certain
behaviour. Various psychologists have discovered what personality trait matters to an
individual in his or her career. Being successful or unsuccessful depends upon how
the individuals control their behaviour in various situations. For example, a candidate
attending an interview may exhibit limited traits. The other trait or behaviour is
concealed or not exhibited.

2.3.3 Characteristics of Personality

Traits and patterns of thought and emotion play important roles as well as the
following fundamental characteristics of personality:

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 Consistency: There is generally a recognizable order and regularity to behaviors.
Essentially, people act in the same ways or similar ways in a variety of situations.
Psychological and physiological: Personality is a psychological construct, but
research suggests that it is also influenced by biological processes and needs.
Behaviors and actions: Personality not only influences how we move and
respond in our environment, but it also causes us to act in certain ways.
Multiple expressions: Personality is displayed in more than just behavior. It can
also be seen in our thoughts, feelings, close relationships, and social interactions.

2.3.4 Development of Personality

There are a number of theories about how personality develops and different schools
of thought in psychology influence many of these theories. Some of these major
perspectives on personality include the following.

2.3.4.1 Type Theories

Type theories are the early perspectives on personality. These theories suggested that
there are a limited number of "personality types" that are related to biological
influences, including:

Type A: perfectionist, impatient, competitive, work-obsessed, achievement-

oriented, aggressive, stressed
Type B: low stress, even-tempered, flexible, creative, adaptable to change, patient,
tendency to procrastinate
Type C: highly conscientious, perfectionists, struggle to reveal emotions (positive
and negative)
Type D: feelings of worry, sadness, irritability, pessimistic outlook, negative self-
talk, avoidance of social situations, lack of self-confidence, fear of rejection,
appearing gloomy, hopelessness

2.3.4.2 Trait Theories

Trait theories tend to view personality as the result of internal characteristics that are
genetically based and include:

Agreeable: cares about others, feels empathy, enjoys helping others

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 Conscientiousness: high levels of thoughtfulness, good impulse control, goal-
directed behaviors
Eager-to-please: accommodating, passive, and conforming
Extraversion: excitability, sociability, talkativeness, assertiveness and high
amounts of emotional expressiveness
Introversion: quiet, reserved
Neuroticism: experiences stress and dramatic shifts in mood, feels anxious,
worries about different things, gets upset easily, struggles to bounce back after
stressful events
Openness: very creative, open to trying new things, focuses on tackling new
challenges

2.3.4.3 Psychodynamic Theories

Founded by Sigmund Freud, this theory emphasizes the influence of the unconscious,
the importance of sexual and aggressive instincts and early childhood experience on a
person. He believed that human personality emerges due to a conflict between our
aggressive and pleasure seeking biological impulses and the internalized social
restraints against them. He proposed three structures which interact with each other:

i) Id: It is the unconscious, irrational part of personality. It is the primitive part

immune to morality and demands of the external world. It operates on the pleasure
principle. It seeks immediate satisfaction.

ii) Ego: It operates on the reality principle. It is the conscious and rational part of
personality that regulates thoughts and behaviors. It teaches the person to balance
demands of external world and needs of the person.

iii) Super Ego: It is the internal representation of parental and societal values. It
works as the voice of conscience that compels the ego to consider not only the real but
also the ideal. It judges one’s behaviors as right or wrong, good or bad. Failing to live
up to moral ideals bring about the shame, guilt, inferiority and anxiety in the person.

2.3.4.4 Behavioural Theories

Behavioral theories suggest that personality is a result of interaction between the

individual and the environment. Behavioral theorists study observable and

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 measurable behaviors, often ignoring the role of internal thoughts and feelings.

2.3.4.5 Humanist Theories

Humanist theories emphasize the importance of free will and individual experience in
developing a personality. These theories propose that within each individual is an
active creative force, often called “self”. This force seeks expression. It develops and
grows. Abraham Maslow proposed the idea of self-actualized people. He proposed
that human motives are arranged in a hierarchy of needs. Human needs are organized
from physiological needs to self-transcendence. Maslow notes that the self-actualized
people have realistic perception, are spontaneous, easily accept self and others, are
creative, and enjoy and appreciate positive aspects of life, like privacy and
independence.

2.3.5 Common Traits That Make a Good Character

Being good requires having more than one good character trait. A good character
possesses a number of positive traits, as well as strong moral principles that benefit
the universe they exist in. Some examples of good character traits are:

I. Dependability: A dependable character makes a good leader, giving others

someone reliable they can trust. A good character is someone who is always there
to support the important people in their life, and doesn’t break their promises. They
show up for their friends and family, and are always there when they’re needed.
II. Kindness: Doing nice things for others without an expectation of anything in
return is a good trait that shows an admirable brand of selflessness, setting an
example and becoming a role model for others. Kindness does not have to mean
your character is weak, either (Mary Poppins is an example of a character who was
kind and caring, but stern and forthright in her execution).
III. Empathy: A good character is empathetic in nature—they have the ability to relate
to those around them. Their ability to put themselves in another’s shoes makes
them compassionate and considerate, qualities that makes the character more
relatable to the audience.
IV. Courage: Courageousness takes on many forms, and whether it’s a final
showdown between the good character and the bad character, a parent going back

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 to school, or a suffragette leading a movement, people admire those who will brave
any adversity, and stand up for what they believe in.
V. Integrity: Good characters do the right thing, exuding enough self-control to
make good decisions on behalf of others—regardless of the cost to themselves. They
consider the implications of their actions and how they will affect those around
them, showing a high level of self-discipline in order to stay true to their values.
VI. Self-awareness: A good character is honest about who they are and what they
want—however, their humility keeps them grounded, and aware of their
limitations. They have no qualms about expressing their authentic self, and do not
let their ego impede their ability to be good.
VII. Affable: An affable character is easy to talk to, and always willing to listen. They
get along well with others, put other characters at ease.

2.3.6 Role efficacy in Employment

Role efficacy means the potential effectiveness of an individual occupying a particular

position in an organization. It is important to understand that the performance of
people working in an organization, depend on their technical competence, managerial
skills and their potential effectiveness in the roles they perform. It is the merging of
the two (the person and the role) that ensures the individual’s effectiveness in an
organization. People with high role efficacy seem to experience less role stress and
work-related tension. They rely on their own strengths to cope with problems, use
more focused behavior, interact with people and the environment, persist in solving
problems (mostly by themselves) and show commitment to their work. If there is a
gap between people and their roles, role efficacy is likely to be low.

Three dimensions to make an employees’ role meaningful:

2.3.6.1 Dimension 01: Role-Making: An employee needs to look forward to

making and understanding his/her own Role, rather than waiting for others to tell
him/her what his/her Role is. This can be achieved by:

Self-Role Integration - rather than distancing self from the Role.

Pro-activity - Initiating actions on own rather than reacting to situations

Creativity - Experimenting and trying new ideas rather than operating on routine

Confrontation - Facing problem rather than avoiding the problems

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2.3.6.2 Dimension 02: Role-Centering: An employee needs to look forward to
make his/her own Role important. This can be achieved by:

Centrality - Feeling central in a system rather being peripheral in the system.

Influence - Make some impact in the system rather than feeling powerless.

Growth – By occupying the Role I grow and otherwise remain stagnated.

2.3.6.3 Dimension 03: Role-Linking: An employee needs to understand that

his/her Role is important rather than shrinking his/her Role. This can be achieved by:

Role Linkage - Linkage of one’s Role with other’s Role rather than being isolated

Helping Relationships - Giving and receiving help rather than becoming hostile

Super ordination - Linkage of one’s Role with larger entity rather than being deprived

2.3.7 Let us Sum-Up

Personality is generally defined as the deeply ingrained and relatively enduring

patterns of thought, feeling and behavior. Understanding personality has proved to be
a difficult and challenging task. It’s so complex that no single theory is able to cover
the total personality. There are four major theoretical perspectives of personality. They
include psychoanalytic, trait, humanistic and social-cognitive perspectives. The
development of personality of an individual takes place in a socio-cultural context. It
is important to understand that the performance of people working in an organization,
depends on their technical competence, managerial skills and their potential
effectiveness in the roles they perform. Person-job fit refers to compatibility of
individual’s characteristics with his or her job’s demands

2.3.8 Check Your Progress

1. Which of the following four theoretical perspectives of personality is incorrect:

a) Psychoanalytic b) Trait
c) Humanistic d) Role efficacy

2. An employee can make his or her role meaningful by:

a) Role Taking b) Role Entering

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 c) Role Linking d) Role Shrinking

3. According to Freud, the mind’s three components are:

a) Ego, Id, Superego b) Oral, Anal, Phallic

c) Unconscious, Moral, Immoral d) Primary, Secondary, Tertiary

4. Humanistic psychologists embraced the idea of:

a) Repression b) The id
c) Unconscious Drives d) Free Will

5. Reading is a _____ process.

a) Encoding b) Codification
c) Decoding d) None of the above

6. Personality traits play an important role in ________.

a) Action b) Self-restraint
c) Performance d) Behaviour

7. One trait that dominates a personality so much that it influences nearly everything
a person does is a _______.

a) Global Trait b) Cardinal Trait

c) Specific trait d) Central Trait

8. Which of the following is a major determinant of personality?

a) Biological b) Environmental
c) Situational d) All of the above

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9. Which of the following statement is NOT true?

a) Personality is purely a psychological construct and researchers also proved that

it is not influenced by heredity processes and needs.
b) Being successful or unsuccessful depends upon how the individuals control their
behaviour in various situations.
c) Personality is a stable, organized collection of psychological traits and
mechanisms in the human being that influences his or her interactions
d) Trait theories tend to view personality as the result of internal characteristics
that are genetically based

10. Under Psychodynamic Theory founded by Sigmund Freud, ‘Id’ is the unconscious,
irrational part of personality. It operates on following principle:

a) Reality Principle b) Capitalism Principle

c) Pleasure Principle d) Usage Principle

Answer Key:

1: d 2: c 3: a 4: d 5: c

6: d 7: b 8: d 9: a 10: c

2.3.9 References for Further Reading

Hall Calvin S., Lindzey Gardner and Campbell John B. (1997): “Theories of
Personality”, 4th Edition, Publisher: Wiley

Hiremath Dr. Saroj (2016): “Life skills and Personality Development”, Publisher :
Success Publications

Rubin Kenneth H. and Coplan Robert J. (2010): “The Development of Shyness and
Social Withdrawal”, 1st edition, Publishers: Guilford Press

Schultz Duane P. and Schultz Sydney Ellen (2012): “Theories of Personality”, 10th
Edition, Publisher: Cengage Learning

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Lesson No. 04: Inter-Personal Relationship

2.4.1 What is Inter-personal Relationship?

2.4.2 Why Interpersonal Relationships?

2.4.3 Types of Interpersonal Relationships

2.4.4 Interpersonal relationships in workplaces

2.4.5 Stages in Formation of Effective Inter-personal Relationship

2.4.5.1 First Stage – Acquaintance

2.4.5.2Second Stage – The Build-up Stage

2.4.5.3Third Stage – Continuation Stage

2.4.5.4Fourth Stage – Deterioration

2.4.5.5Fifth Stage – Termination

2.4.6 Factors affecting Interpersonal Relationship

2.4.7 How to Improve Interpersonal Relationship at Workplace?

2.4.8 Let us Sum-Up

2.4.9 Check Your Progress

2.4.10 References for Further Reading

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2.4.1 What is Interpersonal Relationship?

A strong bond between two or more people refers to interpersonal relationship. The
concept involves social associations, connections, or affiliations between two or more
people. The context can vary from family or kinship relations, friendship, marriage,
relations with associates, work, clubs, neighborhoods, and places of worship.
Individuals in an interpersonal relationship must share common goals and objectives.
They should have similar backgrounds, more or less similar interests and think on the
same lines or at least display tolerance and respect to each other’s views and opinions.
A sense of trust is important. Honesty and transparency plays a pivotal role in
interpersonal relationship.

In a workplace, interpersonal relationship skills allow us to share a special bond or

strong association with our co-workers such that trust and positive feelings for one
another are maintained. Employees working together ought to share a special bond
for them to deliver their level best. It is essential for individuals to be honest with each
other for a healthy interpersonal relationship and eventually positive ambience at the
workplace.

2.4.2 Why Interpersonal Relationships?

From the moment of birth, human beings depend on others to satisfy their basic needs.
Through this, children come to associate close personal contact with the satisfaction
of basic needs. Later in life, we continue to seek personal contact for the same reason,
even though we know we are capable of filling our own needs without relying on others
for survival. Also, being around others becomes a habit and the basic physical needs
of infancy expand to include emotional and social needs as well. These can include the
needs for praise, respect, affection, love, achievement, and so on. It is these needs
which are acquired through social learning that motivate us as humans to seek
relationships with people who can satisfy our needs throughout our lives.

Good relationships require management, effort, and attention, but the investment
pays off in many ways. Special bonds with other people are important for both mental
and physical health. An individual working in isolation is more prone to stress and
anxiety. Research supports the idea that if we have strong, caring relationships with
others, we are more likely to be healthy and live longer. Satisfying relationships with
family and friends promote career success and we feel more protected as well as happy.

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Poor relations, on the other hand, may promote depression, drug abuse, weight
problems, and other mental health problems.

2.4.3 Types of Interpersonal Relationships

We define types of interpersonal relationships in terms of relational contexts of

interaction and the types of expectations that communicators have of one another.

Friendship Theories of friendship emphasize the concept of friendship as a freely

chosen association

Family Family communication patterns establish roles, identities and enable

the growth of individuals. Family dysfunction may also be exhibited
by communication patterns

Romantic Romantic relationships are defined in terms of the concepts of

passion, intimacy and commitment

Professional Professional communication encompasses small group

communication and interviewing

2.4.4 Interpersonal relationships in workplaces

Interpersonal relationships in workplaces, offices or organisations deserve a special

mention. An individual spends around seven to eight hours at his workplace and it is
practically not possible for him to work all alone. Human beings are not machines
who can work at a stretch. They need people to talk to, discuss various issues and share
their feelings at the workplace. It is essential to have trustworthy fellow workers
around with whom one can share all his/her secrets without the fear of them getting
leaked. We must have friends at the workplace who can give us honest feedback.
Research says productivity increases manifold when individuals work in groups as
compared to individuals working alone.

Major benefits of interpersonal relationship in organisations include:

Greater employee satisfaction. Human being is a social animal. Working in

isolation makes an individual prone to stress and he starts to find his job
monotonous. Therefore, interpersonal relationships give employees a chance to
form close relationships with fellow co-workers, developing in them a sense of joy
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 as well as satisfaction. We need people around who can appreciate our hard work,
tell us our mistakes and motivate us from time to time.
Better decision-making. A single brain alone can’t take all decisions alone.
Any important decision making within an organization is based on its employees
brainstorming to find the best ideas and strategies. However, this requires a
platform such that every individual has the liberty and an equal opportunity to
express his views and opinions. Such effective communication is best possible
when employees have close associations with each other that allows for effective
communication as well as some honest feedback.
Direct effect on the organization culture. Misunderstandings and
confusions lead to negativity at the workplace. Conflicts lead one nowhere and in
turn spoil the work environment. One needs to have people at the workplace who
are more like mentors than mere colleagues.
Increased Productivity. An individual needs to get along with fellow workers
to complete assignments within the stipulated time frame and finishes tasks within
deadlines. Roles and responsibilities ought to be delegated as per specialization,
educational qualification and interests of employees.

2.4.5 Stages in the formation of effective interpersonal relationship

It takes time for a relationship to grow and pass the test of time. There are two
possibilities in a relationship:

Possibility - 1: Two people might start a relationship as mere strangers. They get to
know each other slowly and become emotionally and mentally attached to their
partners gradually. Such relationships often lead to lasting commitments where
individuals decide to be with each other until death separates them.

Possibility - 2: Two people might start off well but soon face problems. Troubles in
relationship start when people have different opinions, views and fail to reach to a
mutually acceptable solution. In such cases individuals decide to move on from a
relationship for a fresh start.

According to famous psychologist George Levinger, every relationship goes through

following five stages.

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2.4.5.1 First Stage – Acquaintance

Acquaintance refers to knowing each other. To start relationship individuals need to

know each other well. Two individuals might meet at some place and instantly hit it
off. People feel attracted to each other and decide to enter into a relationship.
Common friends, social gatherings, same organizations also help people meet, break
the ice, get acquainted with each other and start a relationship.

2.4.5.2 Second Stage – The Build-up Stage

This is the stage when the relationship actually grows. Individuals are no longer
strangers and start trusting each other. Individuals must be compatible with each
other for the relationship to continue for a longer period of time. Individuals with
similar interests and backgrounds tend to gel with each other more as compared to
individuals from diverse backgrounds and different objectives. The build-up stage in
a relationship is often characterized by two individuals coming close, being passionate
and feeling for each other.

2.4.5.3 Third Stage – Continuation Stage

This is the stage when relationship blossoms into lasting commitments. It is when
people after knowing each other well decide to be in each other’s company and tie the
knot. Trust and transparency is essential for the charm to stay in relationship forever.

2.4.5.4 Fourth Stage – Deterioration

Not all relationships pass through this stage. Lack of compatibility, trust, love and care
often lead to misunderstandings and serious troubles in relationship. Individuals
sometimes find it extremely difficult to adjust with each other and eventually decide
to bring their relationship to an end. Compromise is an integral part of every
relationship. Individuals failing to compromise with each other find it difficult to take
the relationship to the next level.

2.4.5.5 Fifth Stage – The Termination Stage

The fifth and the last stage is the end of a relationship. Relationship terminates due to
any of the reasons, like end of the job in the organisation, distances due to change in
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workplaces, death of any one partner; divorce, separation, etc. An ideal relationship
results in lasting commitments and marriages whereas there are some relationships
which do start on a positive note but end abruptly.

2.4.6 Factors affecting Interpersonal Relationship

Interpersonal relationship refers to individuals with similar tastes and mindsets and
those who share identical goals and interests enter into an association. It is essential
for individuals in a relationship to get along well. A few of the various factors affecting
interpersonal relationship are given hereunder:

Compatibility: Two individuals in a relationship must be compatible with each

other. There should be no scope of conflicts and misunderstandings in a relationship.
Individuals from similar backgrounds and similar goals in life do extremely well in
relationships. People with different aims, attitudes, thought processes find it difficult
to adjust and hence fail to carry the relationship to the next level.

Communication: Communication plays a pivotal role in all types of relationships -

personal or professional. Here, feelings must be expressed and reciprocated.
Individuals need to communicate with each other effectively for better understanding,
lest it leads to problems and misunderstandings. Two people in love must interact with
each other on a regular basis through various modes of communication such as
telephone, emails, letters (though exchanging letter is now considered an outdated
form of communication). Staying in touch is essential for the love to grow especially in
long distance relationships where individuals can’t meet quite often. In professional
relationships as well, colleagues must communicate well for a better bonding. Sit with
your co-workers and discuss issues face to face to reach to a mutually acceptable
solution. The recipient must understand what the sender intends to communicate
and vice a versa. Clarity of thoughts is essential in relationships.

Honesty: Be honest in relationships. Do not lie or hide things from your partner.
Remember every problem has a solution. Think before you speak. Transparency is
important in relationships.

Stay calm: Do not overreact on petty things in relationships. Stay calm. Be a little
more adjusting. Be the first one to say “Sorry”. It will solve half of your problems.

Forgiving: An individual needs to be a little more forgiving in relationships. Do not

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drag issues unnecessarily. Fighting over small issues is foolish and makes the situation
all the more worse.

Smile: “Smile is a curve that makes everything straight.” Flash your smile more often.
Take care of your facial expressions while interacting with the other person.

Time: Time plays an important role in relationships. Individuals in love must spend
adequate time to know each other better. Frustrations arise when people do not have
time to meet or interact. Even in organization, individuals must spend quality time
with their co-workers to strengthen the bond amongst themselves. Married couples
must take time out for each other for the charm to stay in relationship forever.

2.4.7 How to Improve Interpersonal Relationship at Workplace?

Employees must get along well for a healthy and productive ambience at the
workplace. Following are some of the ways of improving interpersonal relationships:

Employees must communicate with each other effectively for a healthy

relationship. Remember a problem shared is a problem halved.
Interact with your co-workers more often. Discussions must be on an open
platform where every individual has a liberty to express his/her views and
opinions. Written mode of communication is one of the effective ways of
communicating at the workplace. Make sure your emails are self-explanatory and
do mark a cc to all related employees. Ignoring any of your co-workers might hurt
him and spoil your relationship with the individual concerned. Avoid hiding things
from your fellow workers.
Even employees from a different team can be your friends. Talk to them. Greet
them with a smile and a “Hi” whenever you meet them. An individual must not take
things to heart at workplace.
Team leaders and supervisors should conduct morning meetings with
their team members. Do not make the meeting too formal. The employees
should be allowed to bring their coffee mugs. Let them interact with each other.
Morning meetings go a long way in breaking the ice among employees and
improving interpersonal relationships at workplace.
Do not favour any employee just because he is your relative or you know him
personally. Favouritism spoils relationship between superiors and subordinates.

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 Take your team out for lunch, picnics or get together once in a while.
Let the employees bring their families as well. Ask your team members to exchange
contacts amongst themselves for them to interact with each other even after work.
Greet your colleagues on their birthdays or anniversaries. Send them a
nice e-card and do ask for a treat. Such small initiatives go a long way in
strengthening the bond among fellow workers. Important festivals must be
celebrated at workplace for employees to come closer to each other.
Individuals should be motivated to work in teams. Work must be equally allocated
to team members to expect best out of them. No employee should be overburdened.
People working in teams are friendlier and adjust with each other better.
One needs to be a little more adjusting and compromising at the workplace. Don’t
expect everything to be done just the way you like it. You will have all types of
people around. Avoid fighting over petty things. Do not always look at the negative
side of things. Accept people as they are. It is essential to look at the positive side
of an individual. Being flexible at work always helps.
Avoid being jealous. Leave your ego behind the moment you enter the
workplace. Appreciate if someone has performed exceptionally well. Remember
only hard work and nothing else pays in the long run.
Stand by your colleagues when needed. It is only you who can create a healthy
atmosphere at the workplace.

2.4.8 Let us Sum-Up

Interpersonal relationship refers to a strong association among individuals working

together in the same organization. Employees working together ought to share a
special bond for them to deliver their level best. Everybody likes to have an effective
relationship with the other person. However developing good, effective and enduring
relationship with the other person requires patience time and efforts. One can cultivate
a relationship with another person through a long and arduous process. Transactional
Analysis defines some basic Ego States and Life Positions that individuals can adopt,
and uses those to describe how Transactions then occur between two people. The
Johari Window model is a simple and useful tool for illustrating and improving self-
awareness, and mutual understanding between individuals within a group.

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2.4.9 Check Your Progress

1. Which of the following is a correct sequence in formation of effective Inter-personal

relationship?

a) Acquaintance-Build-up Stage-Continuation Stage-Deterioration-Termination

b) Build-up Stage-Continuation Stage-Acquaintance-Deterioration-Termination
c) Deterioration-Acquaintance-Build-up Stage-Continuation Stage-Termination
d) Build-up Stage-Acquaintance-Continuation Stage-Deterioration-Termination

2. The term that describes our thoughts, feelings, and behaviours in relation to other
individuals is ______.

a) Affiliation b) Inter-Group Relation

c) Inter-personal relations d) Attraction

3. Social anxiety ______.

a) Is a negative emotion related to concern

b) Can be a chronic problem.
with interpersonal evaluation.
c) Can be an occasional problem. d) All of the above

4. Factors associated with loneliness are ______.

a) Personality traits such as depression, low self-esteem and introversion

b) Always giving people the benefit of the doubt
c) Social Anxiety d) All of the above

5. Which of the following can account for individual differences in need for affiliation?

a) Social affiliation model and physiological differences

b) Privacy regulation theory and social affiliation model
c) Cultural differences and physiological differences
d) Privacy regulation theory and cultural differences

6. Chronic loneliness is more likely among those ______.

a) who have a low quantity of relationships

b) who make internal attributions for their loneliness

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 c) who make situational attributions for their loneliness
d) who have many, but poor-quality relationships

7. While social anxiety makes people likely to avoid rather than seek out affiliation,
general anxiety ______.

a) also makes people likely to avoid affiliation

b) has no effect on attraction
c) leads people to seek out other people who not feeling anxious
d) leads people to seek out other people who are also feeling anxious

8. Why Interpersonal Relationships?

a) To fulfil Physical needs b) To fulfil Emotional needs

c) To fulfil Social needs d) All the above three

9. Which of the following is NOT a major benefit of interpersonal relationship in

organisations or work place?

a) Increased Productivity b) Better organization culture

c) Better remunerations d) Greater employee satisfaction

10. Which famous psychologist enumerated five stages every relation goes through,
i.e, Acquaintance-Build-up Stage-Continuation Stage-Deterioration-Termination?

a) William McDougall b) John B. Watson

c) Wilhelm Wundt d) George Levinger

Answer Key:

1: a 2: c 3: d 4: a 5: c

6: b 7: d 8: d 9: c 10: d

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2.4.10 References for Further Reading

Kate Cook (2009) : “The Feel Good Factory on Healthy Living”, Publisher : Infinite
Ideas

Petruska Clarkson (1992) : “Transactional Analysis Psychotherapy: An Integrated

Approach Book”, Publisher : Taylor & Francis

Richard West and Lynn H. Turner (2019) : “Interpersonal Communication”, 4th

Edition, SAGE Publications, Inc

DeVito Joseph A. (2019) : “The Interpersonal Communication Book”, 15 th Edition,

Publishers : Pearson Education, Inc.

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Lesson No. 5: Motivation

2.5.1 What is Motivation?

2.5.2 Importance of Motivation

2.5.3 Types of Motivation

2.5.3.1 Intrinsic Motivation

2.5.3.2 Extrinsic Motivation

2.5.4 Motivation Process

2.5.5 Factors responsible for Staff Motivation

2.5.6 Various theories on motivation

2.5.6.1 Need Hierarchy Theory

2.5.6.2 Herzberg’s Theory

2.5.6.3 Theory ‘X’ and Theory ‘Y’

2.5.6.4 ERG theory

2.5.6.5 Applications of motivation theories

2.5.7 Let us Sum-Up

2.5.8 Check Your Progress

2.5.9 References for Further Reading

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2.5.1 What is Motivation?

Motivation is very important for the overall development of the personality and mind
of the people. It also in action and in a competitive state. It is the set of psychological
forces that compel and puts a person to take action. Furthermore, it improves
efficiency and desire to achieve the goal. Scientists define motivation as your general
willingness to do something. It leads to stability and improvement in work. It helps
the person to fight his negative attitude. Above all, it satisfies a person’s needs and
one tries to come out of one’s comfort zone so that desired goal is accomplished. A
motivated person remains progressive and dedicated to push his limits and always
tries to improve his performance day by day. Motivation is a necessary resource to
improve and work productively during changing times as well as threats

Being demotivated means living dull life without any spark and as a worn-out machine.
The critical elements of self-motivation are resilience and optimism. The former will
help to bounce back during difficult times, whereas later, shows a brighter side ahead.
This way, you will be able to control your emotions that are held back.

In an era of increasing competition, the significance of effectively utilizing all available

resources, including human resources, is critical for any commercial organization. The
motivation of employees is one of the fundamental issues that companies must address
in the current marketplace, as it is the key variable that affects employee productivity.

Motivation can be defined in numerous ways, but there are two basic descriptions:

 It can be defined as the main reason or reasons that individuals partake in a certain
behaviour, specifically human behaviour pursuant to the study of psychology or
neuropsychology.

 It can also be defined as the driving force that initiates and drives an individual's
behaviour. It is the internal energy that propels us to achieve our goals. Typically,
it is considered to be a dynamic state of mind not concerned with personality.

2.5.2 Importance of Motivation

Significant for the overall growth of mind as well as personality.

Helps to build self-confidence
Awakens the sense of meaning in life and desire to achieve a meaningful life.
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 Helps to focus on goals based on values and skills.
Helps to learn to organize and prioritize our life.
Necessary resource during changing times and threats.
Teaches perseverance
Helps to fight fears and negative thoughts.
Helps professionals to be positive and happy while working hard.
Help students to concentrate and work hard in the class.

2.5.3 Types of Motivation

There are two major types of motivation:

2.5.3.1 Intrinsic Motivation

It is a type of motivation in which the motives originates from inside the human body.
It refers to the internal driving state stimulating an individual to behave in a specific
way. For example, the hunger is driving force coming from inside to compel an
individual to eat and work for food. Similarly, after doing all day activities, the
individual feels tired and requires a good amount of sleep to relax for the next day.
Our curiosity, internal fears, psychological needs and desires also serve as intrinsic
motives. Major motives are:

Biological drives, e.g., hunger, thirst, relief from pain, sleep, temperature
Curiosity
Internal fears, e.g., fear of rejection
Psychological needs, e.g., need for being accepted and appreciated by others.
Internal desires, e.g., desire to gain power or dominance.

2.5.3.2 Extrinsic Motivation

The driving forces originate and exist outside the human body that stimulate the
individual for certain actions. Though these motives are external but they have a
rewarding or punishing impact for the individual. Major motives are:

Incentives
Bonuses
Allowances

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 Promotion and demotion
Rewards and punishment
Merit and Distinction certificates
Appreciation certificates and prizes

2.5.4 Motivation Process

Five steps of motivation process are explained as under:

i. Identify Unsatisfied Needs and Motives: The first process of motivation

involves unsatisfied needs and motives. Unsatisfied needs activated by internal stimuli
such as hunger and thirst. They can also be activated by external stimuli such as
advertisement and window display.

ii. Tension: Unsatisfied needs to create tension in the individual. Such tension can
be physical, psychological, and sociological. In this situation, people try to develop
objects that will satisfy their needs.

iii. Action to satisfy needs and motives: Such tension creates a strong internal
stimulus that calls for action. The individual engages in activities to satisfy needs and
motives for tension reduction. For this purpose, alternatives are searches and choice
are made, the action can be hard work for earning more money.

iv. Goal accomplishment: Action to satisfy needs and motives accomplishes goals
- to be achieved through reward and punishment.

v. Feedback: Feedback provides information for revision or improvement or

modification of needs as needed. Depending on how well the goal is accomplished their
needs and motives are modified.

2.5.5 Factors responsible for Staff Motivation

In any endeavor that an individual undertakes, motivation (or the lack thereof) is the
key element behind the success or failure of the endeavor. It plays a key role in the
workplace where the effective performance of an employee is concerned. Though
money is a major motivation to work, there are other factors that are responsible to
make an employee fond of working for the employer. What drives an individual to be
successful is referred to as motive. All motives are physiological or psychological in
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nature and fall into one of three categories:

 Homeostatic motives - hunger, respiration, thirst, etc.

 Non-homeostatic motives - curiosity about the environment, seeking shelter, etc.

 Learned or social motives - achievement, approval, power, social affiliation, etc.

On the basis of results of a survey of employees around the world as to what motivates
staff to give their best at work, following motivating factors could emerge:

Appreciation or recognition for a job well done

Being in the know about company matters

An understanding attitude from the management Tactful discipline

Job security Good wages

Interesting work Career advancement

Loyalty from management Good working conditions

2.5.6 Various theories on motivation

Major theories on motivation are given below:

2.5.6.1 Need Hierarchy Theory

Self-
Actualisation

Esteem Needs

Social Needs

Security & Safety Needs

Physiological Needs

One of the most widely mentioned theories of motivation is the hierarchy of needs
theory put forth by psychologist Abraham Maslow. Maslow saw human needs in the
form of a hierarchy, ascending from the lowest to the highest, and he concluded that
when one set of needs is satisfied, this kind of need ceases to be a motivator.

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As per his theory these needs are:

Physiological needs Security or Safety needs

Social needs Esteem needs

Need for self-actualization

As each of these needs is substantially satisfied, the next need becomes dominant.
From the standpoint of motivation, the theory would say that although no need is ever
fully gratified, a substantially satisfied need no longer motivates. So if one wants to
motivate someone, he / she needs to understand at what level of the hierarchy that
person is currently positioned and focus on satisfying those or needs above that level.

2.5.6.2 Herzberg’s Theory

Herzberg’s theory, also known as “two factor theory” is based on research conducted
among 200 accountants and engineers. It categorizes the job related factors into:

Hygiene factors: The word "hygiene" is taken from the medical field, where it
means-taking steps to maintain your health and not necessarily improve it. Similarly
a hygiene factor in this theory of motivation prevents decay but does-not encourage
growth. Similarly, some factors or the needs that are required for employee
satisfaction and their elimination would certainly result in lack of motivation or
dissatisfaction. However, even when they are adequately present, the employee’s level
of motivation is only neutral. Hygiene factors are not directly related to the nature of
the job, but are related to its derivatives, like salary, designation, job security, physical
work environment and safety, HR policies, work schedule, paid leaves and
interpersonal relationships.

Motivators: The motivation factors are intrinsic to the job content and responsible
for adding meaning to the work. It comprises of factors like the job itself, recognition,
feeling of achievement, prospects of career growth, increased responsibility and
decision taking roles, interesting work, rewards and recognitions etc. It is important
to understand that absence of motivation doesn’t lead to dissatisfaction, but their

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presence certainly causes satisfaction.

2.5.6.3 Theory ‘X’ and Theory ‘Y’

Douglas McGregor, in his book “The Human side of Enterprise” states that people
inside the organization can be managed in two ways. The first is basically negative,
which falls under the category X and the other is basically positive, which falls under
the category Y. After viewing the way in which the manager dealt with employees,
McGregor concluded that a manager’s view of the nature of human beings is based on
a certain grouping of assumptions and that he or she tends to mold his or her
behaviour towards subordinates according to these assumptions.

Theory ‘X’ assumes that lower-order needs dominate individuals and theory ‘Y’
assumes that higher-order needs dominate individuals. An organization on Theory ‘X’
lines tends to be authoritarian in nature, the word “authoritarian” suggests such ideas
as the “power to enforce obedience” and the “right to command.” In contrast, Theory
‘Y’ organizations can be described as “participative”, where organizational and
individualistic aims are integrated; individuals can achieve their own goals best by
directing their efforts towards the success of the organization. However, this theory
has been criticized widely for generalization of work and human behaviour.

2.5.6.4 ERG Theory

Alderfer’s theory categorizes the needs into three sets:

Existence: The basic needs required for individual’s well-being like working
conditions, salary, etc. It is a sub-category of hygiene factors.

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Relatedness: It is the need to relate to other individuals, need for social
communication and social identity. Again, this is a sub-category of hygiene factors
since lack of social interaction will cause dissatisfaction. It is for this reason why teams
and individuals working in different geographical locations need to be kept together
through tools like telecommunication & video conferencing.

Growth: It is analogous to the motivation factors in Herzberg theory when an

individual’s self-esteem is somehow satisfied.

The most important contribution of Alderfer’s theory is that if higher order needs of
an employee are not met, his/her lower order needs would become more important.
Suppose the employee is unable to move to next level, perhaps due to company policies
or nature of job, his/her priorities would regress and he/she would begin to expect
more pay, more social interactions etc. Therefore a manager should try to divert the
employee’s attention to relatedness or existence needs. It may, however, be noted that
only growth need can be classified as motivational, thus regression to lower needs and
their fulfillment will only raise the level of satisfaction from ‘frustration’ to
‘satisfaction’, but not to the level of motivation.

2.5.6.5 Applications of Motivation Theories

There are a few very simple moves on the management's side that can be done to keep
the employees' motivation high enough, to be loyal and do their work regularly.

Treat all the employees alike. If some employees are better than others, they may
receive rewards and recognition which is their right. Similarly, if certain employees are
average, they need to be treated with as much respect as the ones who are better.

Never speak ill of one employee in front of the other. Many people use this as
a motivation strategy to make that one employee feel more important. However, the
flip side to this is that if the employees discuss with each other, they will know that and
can lead to inter-personal relationship problems. Hence desist.

Always remember that employees are resources and not dispensable.

Avoid terminating employees, or even speaking of termination or a pink slip with the
employees. Many organizations keep reminding the employees that they are
replaceable. It is insulting and completely demotivating for the employees.

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Be flexible in certain policies, for the sake of convenience. Employees are human
resources and not machines. One cannot be definitive in all their actions. This will
make them more loyal towards the organization. Like, in case an organization has a
lot of female employees, let the timings be a little flexible to keep them stress-free.

Management needs to contain peers of the rest of the employee sector. In

a technical organization, one cannot have completely commercial management. This
will lead to a gap in the thinking process. Also, the employees will not be able to build
a rapport with the management. This, in itself is a de motivating factor.

Never brag of the benefits that are provided for the employees. Always
remember that whatever employees get, from salaries, to perks, is their right. A person
does not only work in a place for the salary, they work for honor and job satisfaction
as well. So, if a manager is providing the employees with any kind of perks, the
employees deserve it. A person working with an organization is a resource to the
organization, that way the salary is a resource to the person. Hence one has to do it
nonchalant and without any kind of taunts.

All these points definitely help the employees in an organization to feel better about
working in the organization, and working with all their loyalty, and heart.

2.5.7 Let us Sum-Up

Motivation is a force that drives people to do things. Employees are normally

motivated to achieve their needs, whatever they may include. Motivation is inside
another person's head and heart. While money is a major motivation to work, there
are many more factors that are responsible to make an employee fond of working for
the employer. Two main components of motivation are the ‘direction’ of the behaviour
and its ‘intensity’. The theory given by Maslow in 1954 is a gradual stair like
phenomenon which says that one need fulfillment leads to the origination of the next
level of need, these needs are defined as Physiological, Safety, Social, Esteem and Self-
Actualization. Herzberg’s theory is known as two factor theory since it attempts to
categorize the job related factors into hygiene factors and motivators.

2.5.8 Check Your Progress

1. Who is author of the book – “The Human side of Enterprise”?

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 a) George Levinger b) John B. Watson
c) Douglas McGregor d) Simon Feud

2. In Theory ‘X’ and Theory ‘Y’ given by Douglas McGregor, “Y” denotes ___ factors.

a) Positive Factors b) Negative Factors

c) Neutral Factors d) Both Positive and Negative Factors

3. Motivation is ______.

a) our ability to understand and perceive b) an internal state that guides our
emotions behaviour to attain the goal
c) our ability to understand cultural norms d) our ability to adapt to our
and values environment

4. Radhika is a role model for her team mates. She wants to make sure her team does
well and wins the championship. Her desire to attain this goal is described as:

a) Intrinsic motivation b) Extrinsic motivation

c) A drive d) A need

5. In terms of Maslow’s Need Hierarchy Theory, the goal of self-actualization is to:

a) find self-fulfilment b) achieve ego mastery

d) understand cultural values and
c) reach our maximum cognitive potential
practices

6. A hypothesis stating that “if higher order needs of an employee are not met,
his/her lower order needs would become more important” was given by :.

a) Clayton P. Alderfer b) Douglas McGregor

c) Frederick Herzberg d) None of the above three

7. Rearrange the steps of Maslow's Need Hierarchy Theory:

A: Self - Actualisation Needs B: Physiological needs

C: Belongingness and love needs D: Self - esteem needs E: Safety needs

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 a) ABCDE b) ADCBE
c) DCBEA d) ADCEB

8. The two factor theory is based on which factors?

a) Safety and self - esteem b) Self - actualisation and status quotient

c) Hygiene and Motivation d) None of the above

9. What does "E", "R" and "G" stand for in the ERG theory?

b) Exponential, Reliability and

a) Export, Risk and Guarantee
Growth
c) Existence, Relatedness and Growth d) None of the above

10. Situation: You are a new employee with ABC Robotics. Your supervisor has
explained your job to you and has indicated that you will have a great deal of control
over your job once you develop your skills and prove yourself. He compliments your
history of accepting responsibility and suggests that you are free to offer constructive
criticism about the way your job is structured. : Your supervisor seems to assume that
your basic nature is _________.

a) Theory ‘X’ b) Theory ‘Y’

c) Theory ‘Z’ d) Theory ‘Y’ and ‘Z’ combined

Answer Key:

1: c 2: a 3: b 4: b 5: a

6: a 7: d 8: c 9: c 10: b

2.5.9 References for Further Reading

Jenny Kellett (2016): “365 Days of Positive Thinking”, Publisher : Create space
Independent Publications

Maslow Abraham H. (1954): “Motivation and Personality”, Harper & Row,

Publishers, Inc.

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Miner John B. (2005): “Organizational Behaviour: Essential Theories of Motivation
and Leadership”, Publishers : ME Sharpe Inc.

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 Unit 03: Profit Planning and Business Development

Lesson No. 1 Branch as a Profit Centre

Lesson No. 2 SWOT and PESTLE Analysis

Lesson No. 3 Break-Even Analysis

Lesson No. 4 Developing Business Strategies

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Lesson No. 1: Branch as a Profit Centre

3.1.1 Introduction

3.1.2 What constitutes profit in Banks?

3.1.3 Why Profit is necessary in any business?

3.1.4 Viability of Branch as a Profit Centre

3.1.4.1 Branch as a Profit Centre

3.1.4.2 Profit Planning

3.1.4.3 Adoption of various Approaches for Profit Planning

3.1.5 Transfer Price Mechanism

3.1.5.1 Concept of TPM

3.1.5.2 Characteristics of a Good Transfer Pricing

3.1.5.3 Practical Methods of transfer pricing

3.1.5.4 How TPM system works?

3.1.5.5 Disadvantages of TPMs

3.1.6 Let us Sum-Up

3.1.7 Check Your Progress

3.1.8 References for Further Reading

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3.1.1 Introduction

The Indian banking sector is critical to study on various grounds for assessing its profit
objectives and profit efficiency. It is considered among one of the well-regulated
financial sectors with robust regulatory institutions. The sector has seen regulatory
reforms, more full technological adoptions, consolidations and rapid financial
inclusion. Rural Cooperative Banking Sector primarily consists of participatory and
self-managed system. District Central Co-operative Banks (DCCBs) exist as
intermediaries between base level primary credit societies and apex State level co-
operative banks. DCCBs are expected to function as balancing centre of finance for the
primary societies in district by providing them with funds when they have shortages
while serving as a clearing house whenever there is surplus. They are also expected to
provide safe place for investing the reserves of primary societies. Apart from the above
they are also expected to supervise, guide and control the working of member societies
in their respective districts. Though profit maximization is secondary for cooperative
Banks, adequate profit is necessary for their survival and healthy operations on
account of socioeconomic obligations, like branch expansion in rural areas and priority
sector advances cannot be fulfilled without adequate profit.

In manufacturing and industrial sector, earnings / profits are derived from sales
division that co-exists with other procurement, processing, operational and
administrative divisions – all having distinct but supportive functions. Generally all
are located in same compound or in close proximity to each other. Unlike above,
banking sector has multiple service outlets – branch network – with identical
functions covering entire gamut of procurement of resources to their utilisation and
effective earnings. Though controlling or regulatory management functions may be at
one place – so-called Head Office – all business operation and customer care related
parameters are repetitive and independent at all if its branches. Balance sheet of any
bank might indicate some figure, but it represents total sum of profit earnings by
individual branches. Accordingly, all branches can safely be measured separately –
individual profit centres.

The cooperative banking activity is marked by itineraries into un-chartered horizons

mingled with risks and heavy competition. The social responsibility that was entrusted
upon the Cooperative Banks digress them from the profit motive. The Vaidyanathan

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Committee on Cooperative Sectors has suggested many measures to create a more
profitable, efficient and sound banking system.

3.1.2 What constitutes profit in Banks?

McFadden developed the theory of profit function and its relation to the production
function of competitive firms in 1966 (Mullineaux, 1978). Further, this concept was
extended to non-competitive firms (Lau, Fuss, and McFadden, 1978). Afterward, the
functional form of profit function was studied (Diewert, 1973). Researchers also used
profit function in the measurement of the economic efficiency of Indian agricultural
firms (Lau & Yotopoulos, 1971).

Like all businesses, banks profit by earning more money than what they pay in
expenses. It represents the rate of return a bank has been able to generate from using
the resources at its command in order to produce and sell services. Unlike cost
function, profit function covers both output (revenue) as well as input (cost) efficiency.
More issues are involved in the output than input efficiency assessment, as output
inefficiencies are more extensive than that of inputs.

A bank’s main assets are its loans to people, businesses, and other companies and its
holding securities, while its main liabilities are the deposits and the borrowed money,
either from other banks or by means of selling commercial paper in the money market.
The main part of the profit of a bank comes from the service fees, charged for its
services and the earned interests from its assets. Its main expense is the paid interest
on its liabilities. To determine bank profitability, it is not enough to just look at the
earnings per share of the banks. It is also crucial to know how effectively and efficiently
a bank is utilizing its assets and equity for generating profits. Three major profitability
ratios to consider while evaluating the performance of a bank are:

Return on assets (ROA): (Net Income / Total Assets)*100

Return on equity (ROE)
Net interest margin (NIM): (Net Interest Income / Total Assets)*100

3.1.3 Why Profit is necessary in any business

It's an accepted maxim in banking that branch profitability is the foundation for a
bank's success. Managing customers effectively at the branch level is critical to a bank's

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overall performance, allowing it funds for the crucial lending activities that drive bank
profits. A few reasons why profit is essential to the longevity, growth and safety of any
business are described below:

(i) Essential for survival – Any entity cannot spend more money than it makes.
(ii) Funds growth – As business revenue grows, key assets expand (accounts
receivable, inventory, rolling stock), and to keep up with that asset growth either
liabilities or equity (or both) also have to grow. Profit is the primary component that
grows balance sheet equity. Growth in equity allows growth in lender/vendor debt.
(iii) Ability to borrow money – Lenders won’t lend money to businesses that
are not profitable. Lenders look to profit to pay back the borrowed money. No profit
= no ability to pay back; therefore no new loan. Lenders also look at profitability as a
way to measure the ability of management to run the company as follows:
 Businesses that are consistently profitable – Great management.
 Businesses that are profitable but erratically – OK management.
 Businesses that lose money – Poor management (run away as fast as possible).
(iv) Grows market value of business – Profit is a yardstick that tests the
efficiency of the business firm. Profit is typically the biggest component of EBIDTA
(earnings before interest, taxes, depreciation, and amortization). Profit is much more
valuable than the assets of the company.
(v) Measures the effectiveness of management – Profit is one way outsiders
measure the effectiveness of the management team. Lenders, investors, and vendors
all use profit as a tool to measure how good management is in running their business.
(vi) Ability to pay down debt – Profitability, if not used to grow assets, can pay
down debt. Businesses without profit cannot pay down debt.
(vii) Builds working capital – Retention of profit is the internal source of funds.
Profit is one of the elements that improves working capital. Businesses that are
consistently profitable have consistent improvements in the ability to fund working
capital needs, such as increased labour costs, big jobs, longer terms, etc.
(viii) Attracts investors – Investors want to be on a winning team. People with
money want to make more money with their money, not lose it. Profitability is the
measurement of management’s ability to operate efficiently (this is defined as making
profit) and investors will typically look at the historic profitability as a reflection of
management’s ability to perform in the future.

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(ix) Hire better employees – Profitability is one of the few things that enable
businesses to hire better people. Profit creates cash. Companies that are not profitable
don’t have the cash resources to pay or increase the pay of good employees.
(x) Builds cash – Profit is one of the few things that will enable a company to
increase cash in the bank. Profit can be used to meet future contingencies.
(xi) Enhances ability to give – Profit is a reward for risk taken in the business.
It is a return on investment. Shareholders and investors in the business expect highest
profit as they expect return on their investment. You can declare dividends if earned
profit, but you can’t if you’ve not.

3.1.4 Profitability and Viability of a Branch as a Profit Centre

3.1.4.1 Branch as a Profit Centre

A branch of a Bank that is accounted for on a standalone basis for the purposes of
profit calculation is known as a profit centre. A branch as a profit centre is responsible
for generating its own results and earnings. It directly adds or normally adds to the
bottom-line or profits of the bank / company as a whole. Profit centers are crucial in
determining which units / centres / locations are the most and least profitable within
an organization. The concept of profit centers enables a Bank's Top Management to
determine how best to focus its resources to maximize profitability. Branches can be
held accountable for their own performance and profitability. A profit centre manager
is held accountable for both revenue and costs (expenses), and therefore for profits.
In other words, any particular branch / division is responsible for generating its
revenues and earnings – justifying its existence. The division-wise analysis helps in
justifying the allocation of resources as between profit centres, and also determines
which activities can be cut down and which need a boost.

3.1.4.2 Profit Planning

Keeping in view the nature of business of any particular branch and its command area,
all profit generating parameters have to be taken care of very meticulously. These
parameters may be all of the business modules, like nature of deposits, loan product
mix, fee incomes, recovery thrusts and management costs, etc. Also, in order to
optimize profits, Management may decide to allocate more resources to profitable

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areas, while reducing allocations to loss-making units and less profitable areas.
Certain areas or approaches have been specifically identified as the prime drivers to
achieve branch profitability are: Business Generation (Cross-sell); Cost Saving;
Revenue Generation; and Customer Delight & Retention. Process Excellence and
Innovation within the function are the main enablers. There is a valid need for profit
planning exercise at every branch level and the exercise will go a long way in increasing
income of a branch, reducing expenditure and augmenting profit - an important
parameter for performance of a branch.

Seven steps to be taken in an effective profit planning exercise at the branch are as:

Step 1. Development of cost consciousness and austerity culture at the branch

with the branch manager and the officers playing the lead role;
Step 2. Encouragement of a balanced mix of commercial and Institutional credit
and priority sector advances with emphasis on non-fund based facilities;
Step 3. Developing a judicious blend of deposit mix with greater thrust on
current accounts, savings bank and short term deposits;
Step 4. Effective cash management and closer monitoring of the balances in the
account with State Bank of India/ Other Banks;
Step 5. Control over Inter branch adjustments;
Step 6. Recovery of bank's bad/sticky/decreed advance accounts; and
Step 7. Prevention of revenue leakages.

3.1.4.3 Adoption of various Approaches for Profit Planning

While Banks are getting more and more pressure from customer’s increasing demand,
highly competitive market and strict regulations, understanding customer behaviour,
their attitudes and requirements is more vital than ever for banks’ strategic thinking,
operational planning and day-to-day customer treatment. Rather than decrying
customer’s increasing demand and competitive market, if bankers can embrace the
new reality – and focus on innovation, disruptive technology and automation--- the
profit will follow!!!! Banks can adopt following approaches:

Product Bundling and Relationship Pricing – Banks need to think beyond

‘one-size-fits-all’ strategy to cater to customer’s increasing demand. Customers
also will leave an institution for another based on getting the services they want
and the best price available for it, so relationship pricing and product bundling
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become ever more important. Banks should look at products and pricing based
upon a total customer view and respond to the value that customers bring to the
bank across the spectrum of rates, fees, features and services. Many banks are
now-a-days bundling identity theft alerts and credit score reports with a checking
account which provides increased account sales because of the attractiveness of the
bundled features.
KYC and Customer Profile View - Though there are many challenges in
integrating cross-lob data like extracting data from multiple disparate systems,
existence of duplicate records in business applications/ databases and data sharing
impediments due to opt-out policy/other regulatory requirements, it is crucial to
have a 360 degree view of customer which will help to get a holistic picture of a
customer’s demographics, engagement, need and preferences. This knowledge
enables organizations to precisely target products and services to current
customers, ac quire more profitable customers, reduce marketing costs, improve
customer satisfaction and maximize lifetime value.
Sophisticated customer segmentation is the key to cater to individualized
needs and should be based on standard banking metrics – tenure with the bank,
number of accounts, balances of accounts and loans, frequency of interaction with
the bank, channel preferences along with psychographic (values, attitudes,
lifestyles), behavioural (usage rate, price sensitivity, brand loyalty, and benefits
sought) and demographic variables (occupation, income, and family-status).
Real time cross –selling/up –selling - Banks can use real-time events and
deep customer insight to offer cross-channel marketing campaigns where
“moments-of-truth” (wedding, home purchase/sale, new job, stock transactions)
are acted on as a way to deepen customer relationships - to determine next best
action, be it an offer, channel, message, piece of content, etc . The more customized
product/service offering, the higher are the barriers to switching banks.
Innovative Reward Design - In today’s hyper-competitive market, banks need
to move beyond a “one-size-fits-all” reward model particularly for the most
profitable clients. They need to design a system which let profitable customers
enjoy premium benefits and redeem rewards points easily and in various ways (for
gift cards, merchandise, holidays, events and experiences, or cash, etc.).
Automating customer care – In the digital age, customers demand more self-
service options and any-time, anywhere service. So expanding customer self-
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service, case management, dispute management and event-based decision-making
can be perceived as better customer care, while lowering operational costs and
increasing effectiveness. However, banks should continue to make compelling
offers as incentives for customers to use lower cost channels.
Digital Revolution – It might just be feasible that what social media is really
doing today is more than socializing the web. It might be possible that this drive
towards great usability, human interaction design, multi-touch, augmented reality,
geo-location and connectedness is actually creating a digital service platform that
could revolutionize the ability of an organization to look after customer. Banks
should try to engage consumers through digital channels and advance its
leadership in the digital space as well as expand its social media engagement on
Facebook, Twitter, Pinterest and LinkedIn. Though there can be several roadblocks
and complications – like online account opening is expensive on per-account bass
- however, prices for new delivery channels always commoditize as usage grows. It
is a myth that importance of branches will diminish as the digital channel usage
will increase on the contrary, if branches are tightly integrated with other channels,
that promote and support them and that quickly finish transactions started there
will be more successful than ever.
Fraud Screening – Big data capabilities provides banks the ability to understand
their clients at a more granular level and more quickly deliver targeted
personalized offers. Being able to anticipate customer needs and resolve them
before they become problems allows banks to deliver timely, concise and actionable
insight to contact centre agents. This can lead to increased sales, improved
customer satisfaction and a reduction in operating costs. Fighting fraud, financial
crimes and security breaches, in all forms, is among the most costly challenges
facing the finance industry. Big data technologies provide a scalable, integrated,
secure and cost effective platform to more quickly prevent, detect and mitigate
internal and external frauds. Big Data Benefits include: Reduced costs of fraud
screening and monitoring fewer false positives, reduced cost of fraud
investigations, reduced payment fraud losses, real time fraud detection and
mitigation, optimized offers and cross-sell.
Multi-Channel Seamless Experience – Banks should seek to attract and
retain customers with a compelling multi-channel experience across all touch
points (branches, online, mortgage and investment advisors, etc.). Technology
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 continues to rapidly change the way consumers behave and interact. Virtual
channels are becoming more relevant, with the increasing penetration of high-
speed Internet connectivity and Web-enabled mobile devices allowing consumers
to spend more time online. Bank customers will not only continue to use a mix of
channels, but will use non-branch channels for increasingly complex banking
transactions. While retail branches remain a core banking channel, research shows
that customer traffic is in some cases flat or declining, as customers come to rely
more heavily on digital/phone channels. In fact, online banking and call centers
account for 55 percent of transactions today. This shift can be a positive
development for banks, but requires the right set of investments and development
of new capabilities.
Innovative Bank Branch Design - Hip, modern, and fun. That’s exactly the
vibe many of the nation’s banks are trying to achieve as they reimagining their
branches and try to lure more customers into brick-and-mortar offices. The high-
counter old teller stations and staff, who are versed in transactional banking, won’t
work now. Withdrawals and deposits aren’t attracting customers to brick-and-
mortar offices anymore, so banks are turning to perks like coffee bars and yoga to
keep an important gateway open. Modern and innovatively designed branches will
drive customer engagement and is the key to branch long-term success.

3.1.5 Transfer Price Mechanism

3.1.5.1 Concept of TPM

Simply speaking if one considers profit as excess of income over expenditure, the same
has to be re-thought in branch-level system. Some branches could be predominantly
deposit centers and some predominantly advance centers. These deposit oriented
branches would be paying more interest than earning and thus could end up incurring
losses if measured in isolation. Whereas, the branches having more advances might
earn more by way of interest income and may not have that much of deposits on which
to pay interest. Such branches will end up earning profits. This means that in one
branch, accumulation of deposits might be on the higher side resulting in higher
payment of interest and in another branch, huge advances leading to better income
generation on account of interest receivables. In such scenario, the branches which

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have more deposits are considered supplier of funds and those advances oriented
branches treated as units seeking funds to lend.

Thus, an individual deposit oriented branch though not earning cash profit on a
standalone basis, is contributing its might to lower the overall cost of funds in the bank
as a whole by avoiding outside and forced costly borrowings. Indirectly, it is
contributing its efforts for overall bank profit as its deposit is being used by some other
branch. Thus, it becomes imperative to recognise and translate their contribution in
monetary terms and declare their role in profit of the organisation. Accordingly, such
branches have to be suitably rewarded or compensated. This measurement and
allocation is done through Transfer Price Mechanism (TPM) in banks. These deposit
centric branches will show a profit after adding interest accounted by head office of
the bank. Likewise, for the advances given, lending oriented branches have to pay
interest on money received from HO of the bank treating it as money borrowed from
HO. In other words, comparing it from industrial sector, it is the price at which goods
or services are transferred from one division to another within the same organization.
It represents ‘revenue per unit’ to the profit centre ‘selling’ the good and ‘cost per unit’
to the profit centre ‘buying’ the good.

The transfer price mechanism can enhance the management of margin, i.e. lending or
credit spread, the funding or liability spread and mismatch spread. It also helps
centralising interest rate risk at one place which facilitate effective control and
management of interest rate risk.

3.1.5.2 Characteristics of a Good Transfer Pricing

Goal congruence. The transfer price should be in the best interest of the company
overall. The decisions made by each profit centre manager should be consistent with
the objectives of the company as a whole. Encourage divisions to make decisions which
maximize group profits.

Fairness. The divisions must perceive the transfer price to be fair since the transfer
price will impact divisional profit and hence performance evaluation

Autonomy. The system used to set the transfer price should seek to maintain the
autonomy of the divisional mangers. This autonomy will improve managerial
motivation

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Bookkeeping. (Recording the movement). The transfer price chosen should make it
straightforward to record the movement of goods or services between divisions

Minimize global tax liability. Multinational companies can use their transfer
pricing policies to move profits around the world and thereby minimize their global
tax liability. Management should be aware that anti-avoidance legislation exists to
prevent companies using TP policies to divert profits to subsidiaries based abroad.

3.1.5.3 Practical Methods of transfer pricing

Method 1: Market based approach. If a perfectly competitive market exists for

the product, then the market price is the best transfer price. Care must be taken to
ensure the division’s product is the same as that offered by the market (quality,
delivery terms). Market price has to be adjusted for costs that are not incurred on an
internal transfer.

Method 2: Cost based approach. The transfer price is based on the production
cost of the upstream division. A cost based transfer price requires that the following
criteria be specified – i) Actual cost or budgeted (standard) cost; ii) Full cost or variable
cost. The amount of mark up, if any, to allow the upstream division to earn profit on
the transferred product. If a perfectly competitive market does not exist for the
product, the transfer price can be set at cost + % profit. The cost may be:

In order to adopt fair transfer price, authorised Board committees at Head Office of
the Bank has to fix actual cost of deposit plus a reasonable administrative cost on a
lump sum.

3.1.5.4 How TPM system works?

The unitary system is the simplest. There is only one rate for lending and borrowing
from the HO. It doesn't matter whether bank balances are based on credit or debit.

The dual system uses one rate for borrowing and another for lending by the head office.

Multiple systems implement multiple price mechanisms. Deposits and advances are
provided by the head office at different rates -- although branch profitability is based
on both, instead of stressing one or the other.

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A proper Transfer Price Mechanism be adopted to arrive at realistic profit of the
branch. Though bank as a whole, it may not give any impact separately, it is necessary
that appropriate profit of the branch is arrived at to boost the branches to develop
desire to earn more profit. A simpler but rational way of TPM can be stated as under:

Example: Suppose a branch has Rs. 100 as demand and time liability (DTL), i.e.
deposit. The percentage-wise utilization is broadly as under:

• CRR balance : 05.00%

• SLR investments : 25.00%
• Advances : 70.00%
The parameters for assessing profit and loss would be as under:

 5% of DTL at branch is presumed as cash balance with Public Sector banks and
StCBs for DCCBs and RBI for StCBs. No interest is earned on it. So, on this
amount no interest will be transferred from Head Office.

 25% of DTL at the branch would be presumed as investment for SLR. On this
amount, interest will be transferred from Head Office at the rate of yield on SLR
investment at H.O.

 Interest paid on deposits would remain at the branch.

 Interest income on advances would remain at the branch.

 Exchange and commission would remain at the branch.

 Salary and allowances of branch staff and other overheads of branch would remain
at the branch.

 If advances of the branch are less than 70% of the DTL, the balance of DTL would
be transferred to H.O. On this transferred balance, H.O. would pay interest to the
branch at the rate of yield on advances at H.O.

 If the advance at the branch is more than 70% of DTL, then the portion above 70%
would be borrowed from H.O. and branch would pay cost to H.O. at the rate of cost
of deposit at H.O.

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 Expenses on salary and allowances and other overheads at H.O. would be borne by
branches in proportion to their total business, i.e. deposit plus advances at the
branch. These proportionate expenses would be transferred from H.O. to branch.

3.1.5.5 Disadvantages of TPMs

The unitary system has two flaws. Bank branches supported by advances reflect higher
profits than those supported by deposits. This happens because deposits garner more
interest payments than advance. Additionally, the unitary system fails to identify the
performance between fund allocation and its performance.

The dual system doesn't take into consideration interest rate structures determined,
not by the head office but the market itself. Rural branches are put at a disadvantage
because their indications of profitability - based on savings and term deposits - are
inaccurate. Advance-based branches are inaccurately represented, too, because there
is no differentiation between types of advances bundled together. Term deposit-based
branches indicate lower profits because the interest rate is high.

Multiple systems are prone to problems related to international banking practices.

Although the cost of running each branch differs from branch to branch and changes
year to year, this is not reflected in profitability reports until the cost is stabilized.
Overall, there are no set rules regarding profitability, so there is vulnerability to any
change in business operations.

3.1.6 Let us Sum-Up

Every business organisation’s main aim is to earn a profit. It is very important for the
survival of the organisation. It's the only factor to know the efficiency of the business.
Though Profit maximization is secondary for cooperative Banks, adequate profit is
necessary for their survival and healthy operations on account of socioeconomic
obligations, like branch expansion in rural areas and priority sector advances cannot
be fulfilled without adequate profit. The cooperative banking activity is marked by
itineraries into un-chartered horizons mingled with risks and heavy competition. The
social responsibility that was entrusted upon the cooperative Banks digress them from
the profit motive. It's an accepted maxim in banking that bank branch profitability is
the foundation for a bank's success. Every branch is expected to serve as an individual
profit centre. But practically it may not be possible as certain Branches, being resource
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centres can only mobilize deposits and their share of the business concentrates on
deposits. Transfer Price Mechanism (TPM) refers to the process in which branches
are allowed to earn interest on their lending to Central Office viz. the balances held in
Deposit accounts in their books and pay interest on their borrowings from Central
Office viz. Balances held in Advances accounts in their books. The primary objective
of this exercise is to arrive at the working-results of the branches on "realistic-basis".
Transfer pricing is purely an internal bookkeeping exercise which does not affect the
overall profitability of the bank (no recognition of internal profit in financial
statements), but allows the performance of each bank branch to be evaluated on the
basis of profit under the concept of a Profit Centre.

3.1.7 Check Your Progress

1. Cooperative Banks prepare the accounts for:

a) Calendar Year (Jan to Dec) b) Financial Year (Apr to Mar)

c) Cooperative Year (July to June) d) Bank Board is free to decide

2. In “branch as a profit centre” concept, all branches of a cooperative bank have to

prepare their balance sheets which are then compiled at Head Office level.

a) True b) False

3. Transfer price mechanisms are used in businesses with multiple branches. In

banking sector, TPM has been relaxed by RBI for which of the following?

a) Banks with less than 20 branches b) Cooperative Banks

c) Small Finance & Payment Banks d) None of the above

4. Full form of acronym “TPM” in banking?

a) Total Price Management b) Total Price Methodology

c) Transfer Price Mechanism d) Tertiary Promotion Methods

5. Which of the following are steps in effective profit planning exercise?

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 a) Development of cost consciousness b) Effective cash management and
and austerity culture at the branch closer monitoring of the balances
c) Prevention of revenue leakages d) All the above three

6. Which of the following statement is incorrect?

a) Social responsibility entrusted upon Coop. Banks discharges them of profit

motive.
b) Profit is essential for survival and achieve fund growth of any business.
c) To improve public image and customers’ faith, profitability is a key word.
d) Businesses without profit cannot discharge their debt or liabilities.

7. If individual bank branch is considered as a profit centre, which of the following is

incorrect?
a) Each branch is responsible to justify its existence
b) Branch is held accountable for their own performance and profitability
c) Profit centers are crucial in determining which locations are the most or least
profitable.
d) Individual branch not earning profits needs to be closed within a period of 2
years.

8. Transfer Price Mechanism refers to the process in which branches are allowed to
earn interest on their lending to Central Office viz. the balances held in Deposit
accounts in their books and pay interest on their borrowings from Central Office viz.
Balances held in Advances accounts in their books.

a) True b) False

9. Transfer pricing is purely an internal book keeping exercise because:

a) TPM does not affect the overall profitability of the bank.

b) It offers no recognition of internal profit in financial statements of individual
branches.
c) TPM allows the performance of each bank branch to be evaluated on the basis of
notional payment of interest on the amount generated by way of deposits and
passing it on to HO for use in other branches.
d) All the three above.

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10. Which of the following statements is NOT true:

a) Automating customer care services lower operational costs and increase

effectiveness.
b) Balance sheet of any bank might indicate some figure, but it represents total sum
of profit earnings by individual branches.
c) Under TPM, if a branch is making more deposits and that amount is used by HO
or other branches for lending, interest amount earned on the loan (net of
management cost) has to be transferred in that branch account on a periodic
basis.
d) A branch of a Bank that is accounted for on a standalone basis for the purposes
of profit calculation is known as a profit centre.

Answer Key:

1: b 2: b 3: d 4: c 5: d

6: a 7: d 8: a 9: d 10: c

3.1.8 References for Further Readings

Akhigbe, A. and Mcnulty, J.E. (2011) : “Bank monitoring, profit efficiency, &
commercial lending business model”, Journal of Economics and Business,
63(6), 531–551

Chakrabarti, R., Chawla, G., Rakshit, M., & Bose, S., (2008) : “Bank efficiency in
India since the reforms: An assessment”, Dynamics of Indian Baking: Views and
Vistas”, Xiaogang: Atlantic publisher, 39-60

Das, A., Nag, A. and Ray, S.C. (2005) : “Liberalization, ownership, and efficiency in
Indian banking: A nonparametric analysis”, Economic and Political Weekly,
40(12), 1190–1197

Mullineaux, D. J. (1978) : “Economies of scale and organizational efficiency in

banking: A profit‐function approach”, The Journal of Finance, 33(1), 259–280

Piyush Kumar Singh & Keyur Thaker (2020) : “Profit efficiency and determinants of
Indian banks; A truncated bootstrap and data envelopment analysis”, Cogent
Economics & Finance

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Lesson No. 2: SWOT and PESTLE Analysis

3.2.1 Introduction

3.2.1.1 What is a SWOT analysis?

3.2.1.2 What is a STEP or PEST or PESTLE analysis?

3.2.2 SWOT analysis

3.2.2.1 Advantages and Limitations of SWOT

3.2.2.2 Steps to conduct a SWOT analysis

3.2.2.3 Best Practices while conducting SWOT analysis

3.2.3 STEP / PEST / PESTLE Analysis

12.3.1 Advantages and Limitations of PESTLE

12.3.2 Steps to conduct a PESTLE analysis

3.2.4 Let us Sum-Up

3.2.5 Check Your Progress

3.2.6 References for Further Reading

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3.2.1 Introduction

Organizations do not exist in a vacuum but rather exist, co-exist, compete and
cooperate in an interrelated environment characterized by their complexity of
operations. Understanding this environment is fundamental to decision making and
strategic planning for perceived growth. Managements must be very clear about all
positive and negative factors inside and outside the firm that influence the success. A
consistent study of the environment in which the firm operates helps in forecasting
the changing trends and anticipated adjusting measures. Of late, there is a
proliferation of strategic planning tools like SWOT / STEP / PESTLE, etc. to enable
managers to formulate competitive strategies in line with the requirements of their
business environments.

3.2.1.1 What is a SWOT analysis?

SWOT is an acronym for “Strengths, Weaknesses, Opportunities, and Threats.” A

SWOT analysis is a high-level strategic planning model both from internal and
external perspectives. SWOT analysis can be traced back to 1960 when Albert
Humphrey of the Stanford Research Institute explored the reasons for unsuccessful
corporate planning. Today, the SWOT analysis is one of the important concepts in the
business world and is widely used by all types of organizations to help build their
strategic plans.

SWOT analysis groups key pieces of information into two main categories:

1. Internal factors: Strengths and weaknesses are internal factors to organization

(things you can control), like team members, software, and geographic location.

2. External factors: Opportunities and threats represent external factors (things

you can’t control), such as competitors, regulations, and economic trends.

Organizations use SWOT to plot out a future course that plays on their strengths and
minimizes risks by honestly simulating the short-term future. The insights thus
gained are then used constructively as part of the strategic planning process. In
nutshell, a SWOT analysis is a strategic balance sheet of an organization.

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3.2.1.2 What is a STEP or PEST or PESTLE analysis?

Owing to expansion of operational areas of majority of business houses including

banks, multistate or even global existences has been widely noticed. Accordingly,
external factors lay predominant influence over their functioning and working styles.
These factors ramify into Social, Political, Economic, Technological issues; and even
into Legal and Environmental aspects. Such characteristics were first cited by a
researcher named Francis Aguilar who published a book in 1967 referring to ETPS.
Subsequently, different workers accorded different priorities and preferences amongst
these factors and their abbreviations were variedly cited as STEP, ETPS, PEST,
PESTEL or PESTLE. Sometimes geographical or continental factors are also added
into such studies or analysis, you may find that the PESTLE becomes too broad and
explicit far reaching and complex results. Such analytic frameworks explore and
investigate into external factors that may impact any kind of business and their
strategic planning both in short and long-terms.

3.2. 2 SWOT Analysis

SWOT analysis (alternately SLOT analysis) is a strategic planning method used to

evaluate the Strengths, Weaknesses / Limitations, Opportunities, and Threats
involved in a project or in a business venture or even a cooperative bank.

3.2.2.1 Advantages and Limitations of SWOT

SWOT as a framework has several advantages:

 It is simple to understand and use

 Identify barrier that will limit goal/objective
 Reveal possibilities & limitation for change
 Revise plan to best navigate system
 Decide on direction that will be most effective
 There’s an easy process to follow through
 You can do it on your own, as a team in person, or as a group remotely
 It can provide a good analysis of both internal and external issues
 Combines quantitative and qualitative analysis

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  Encourages inter-departmental collaborations within the organisation

While it’s a great tool, SWOT can be mishandled:

 SWOT itself is not an analysis, but a framework for capturing conclusions

 It has no actions within the framework
 It is easy to be too broad or not factual enough, which will disrupt the SWOT
 It doesn’t contain a way to weight the importance of the elements of the SWOT

3.2.2.2 Steps to conduct a SWOT analysis

A well done SWOT can be an insightful and simple snapshot of what to consider when
you are giving final shape to development strategies. Consider the 'SW' part of the
SWOT to be internal, so these lists will be populated by looking at our resources, our
products, our internal processes, etc. Conversely, the 'OT' part is external, so consider
the wider market, what competitors are up to, any major changes in society,
technology, legislation, etc. The ‘OT’ is all about the future of the business, driving it
forward and growing in ways that you had not previously considered.

A - Create a SWOT matrix

This is the grid-like matrix that will house the information gathered by the team
undertaking the exercise. As can be seen in the template below, each quadrant features
one of the four elements in the matrix format.

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B - Always Start With Strengths

Helpful Questions:

 What’s your sales USP?

 Why will/do clients pick you over the alternatives?

 What are the backgrounds of your employees?

 How have you responded to market changes?

 What has been particularly successful for you and why?

 What are the owner profiles?

C - Focus on Weaknesses

Helpful Questions:

 Look at a few customer complaints - what happened and why?

 Have you churned clients, if so why?

 What level of industry expertise do you have in the business?

 Where does it cost money to run the business?

 What’s your staff training plan?

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D - Review Internal Analysis

At this point you have a full refined list of 'SW' analysis, giving you a picture of internal
business. Take a step back and review both lists together, is there anything missing, or
have you a complete picture of your internal workings?

E - Look for Opportunities

Helpful Questions:

 What are the technological trends impacting your clients?

 In peer sector, is there any news for Market consolidation / Mergers and
Acquisitions?

 Would your product work overseas?

 What are firm’s expansion plans? See into the capital base.

 What problems can you solve with your skill-base?

 What do clients ask for?

 How do your Strengths and Weaknesses convert to Opportunities?

F - Identify the Threats

Helpful Questions:

 How is your product and service provided?

 Have you lost a client, if so to whom? Competitive activity in client base.

 What is the spread of your revenue? e.g., one key client?

 What trends will impact your product - Legal, political or social changes?

 Will your product or service be needed given the changes occur?

G - Taking Action

Once SWOT is completed, it is time to come up with the key actions. It is surprising
quite often a SWOT is completed and not utilised to its full potential. The following
actions should always be taken:

Quick Wins: There will be quick wins that can be actioned from your SWOT. It could
be weaknesses that can quickly be removed, or opportunities you can rapidly take

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advantage on without any extensive changes. These should be allocated to a manager
or employee and actioned.

Long Term: A SWOT is part of a wider process, it has given you a picture of the
internal and external landscape. It is recommended that it is used in conjunction with
other tools as by itself it does not provide you with a full picture in order to plan
successfully.

H - Re-using SWOT

SWOT analysis can be extended in the following ways:

 Use as a foundation for future SWOTs. Each time you repeat SWOT, using your
latest one as a template will save time. Each point still needs to be discussed and
agreed, and it will quickly become apparent if you have made progress.

 Competitor analysis SWOTs are often produced as a way to show your position
against other companies.

3.2.2.3 Best Practices while conducting SWOT analysis

To create the most accurate and effective SWOT analysis, adopt best practices:

Encourage open and honest conversation. Create an environment that

encourages candidness, meaning use of sticky notes to gather anonymous feedback
rather than having people raise their hand to state a company weakness out loud.

Promote collaboration. Have everyone write all their ideas on sticky notes, put
them on a board, and then walk through them as a group. Combining similar ideas
might help people to think of more. Breaking up a large group into smaller groups
of three or four employees may be considered to encourage the sharing of ideas.

Vote to narrow down ideas. The group will generate lots of ideas. You want to
take them all into consideration, but you don’t need to keep every idea; this should
be a fairly high-level exercise. Rank the top 10 and list those to focus on. And
remember—the SWOT isn’t intended to project 10 years down the road; it should
look at where you are now and in the very near future.

To identify external factors, look at the competition. Another way to

identify external threats and opportunities is to look at your competitors. What
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 opportunities are they currently after, and can you use that to your advantage?
What threats are they currently facing, and how does that apply to you?

Be specific when describing internal factors. For example, “brand image”

can be both a strength and a weakness, depending on how you word it. Be specific
in your descriptions; ultimately, that specificity will also help you define the right
measures and benchmark your performance over time.

Keep emotion out of the room. This exercise should be objective, not
subjective. If a statement can’t be backed up with facts, it doesn’t count.

Try to make your resulting strategy “weatherproof.” Current threats may

include the possibility of more political and economic turmoil, but these kinds of
obstacles tend to be much more complicated than those you’d see in most SWOT
analyses. While it may be difficult to address them fully, try to develop a strategy
that will bolster your organization during hard times. For example, a retail store
might consider creating an objective to ensure its online and in-person stores
perform equally well should either avenue be cut off due to external circumstances.

3.2. 3 STEP / PEST / PESTLE Analysis

Importance of external factors have gained significance owing to extension of banking

and other business houses crossing geographical and political boundaries. Though
SWOT analysis is a way of understand and evaluate all facets of banking industry today
positioning us better to make decisions about the future, there are external factors that
impact future of our industry. These factors are beyond our control but still require
consideration as we map out our business strategies. That is why many organisations
choose to complement a SWOT analysis with a PEST analysis—together, they provide
a complete picture of a business environment for effective strategic planning. PESTLE
stands for Political, Economic, Social, Technological, Legal and
Environmental — key areas outside business but likely to impact critically. These
factors tend to play out over long time frames. An economic slowdown, for instance,
could take years to resolve, but you can take action to address staff training issues fairly
quickly. Thus, a PESTLE analysis is more valuable than SWOT when it comes to
formulating longer-term plans and business strategies.

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3.2.3.1 Advantages and Limitations of PESTLE

PESTLE as a framework has several advantages:

 It’s simple to understand and use

 There’s an easy process to follow through

 You can do it on your own, as a team in person, or as a group remotely

 It can provide a detailed but digestible view on the external factors

 It makes people look outward at the business environment

As with every tool, PESTLE too has some limitations:

 It is easy to be too broad or not factual enough, which will disrupt the PESTLE

 It has high level detail on a lot of subjects, rather than in-depth analysis

 It doesn’t contain a way to weight the importance of the elements of the

PESTLE

3.2.3.2 Steps to conduct a PESTLE analysis?

A - Create a PESTLE matrix

It’s commonly presented as a six pillar structure and can be applied to any business or
any industry. As can be seen in the PESTLE analysis template below, each column
features — Political, Economic, Social, Technological, Legal and Environmental.

B – Political Pillar

Helpful Questions:

 What are thrust areas projected by various political parties in manifestoes?

 What type of industries are your customers working in?

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  When is the next election? Stability of political landscape, international
relations, etc.

 Is your business multistate or international?

C – Economic Pillar

Helpful Questions:

 Are all of your bank branches in one state or country?

 What is your current tax footprint?

 What is the forecast for your country’s economic growth?

 Historical data on inflation, recession and movement in currency values.

D - Social Pillar

Helpful Questions:

 Which population segments are business targets and how are they changing?

 What are the demographics of your employees?

 How may these change in the future?

 Cultural trends - age, population rate, education level, lifestyle and culture

E - Technological Pillar

Helpful Questions:

 What are company’s current operations and how could technology impact them
from innovation to operations?

 Profiles and usage of device and equipment, Data tools / AI levels

 How are your products or services impacted by the rate of technology change?

 What parts of your company could benefit from automation?

 Does your own company or others in the peer sector own R&D Department?

F - Legal Pillar

Helpful Questions:

 Department by department, which laws influence you in day to day operations?

 Are there new laws coming into effect within the next 12 months?
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  Do you have an in-house lawyer or outsourced service you can ask for?

G - Environmental Pillar

Helpful Questions:

 What aspects of your business impact the environment?

 How sustainable are your resources?

 Historical and current data relating to climate change, weather conditions.

 Green taxes and policies in the area of operation.

 What aspect do employees currently play in your company CSR?

H - Taking Action

At this point you have a full PESTLE analysis, giving you a picture of all the external
factors that could impact your company. Take a step back and review all pillars
together, is there anything missing, or have you a complete picture?

Quick Wins / Mitigations: There will be quick wins and mitigations that can be
actioned from your PESTLE in your day to day business, to remove or mitigate any
threat or take advantage of opportunity. These should be allocated to a manager or
employee and actioned.

Long Term: A PESTLE is part of a wider process, it’s given you a picture external
landscape. We recommend its use in conjunction with other tools as by itself it does
not provide you with a full picture in order to successfully plan.

I - Beyond PESTLE

PESTLE analysis can be extended in the following ways:

 Use current analysis as a foundation for future PESTLEs. Each point still needs to
be discussed and agreed, and it’ll quickly become apparent if you’ve made progress

 At the time of new product development, PESTLEs can be produced as a way to

show changing trends outside of your business and helps to react accordingly.

3.2. 4 Let us Sum-Up

A SWOT analysis helps us to match our bank’s resources and capabilities to combat
threats and opportunities in the competitive environment. It can be viewed as a reality

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check for the organization. SWOT analysis can be very subjective, but adding, weights
and criteria to each factor increases the validity of the analysis. SWOT analysis is
a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations,
Opportunities, and Threats involved in a project or in a business venture. The SWOT
Matrix provides an illustrative way to display these data that is easy to understand.
However, it is always better to conduct a SWOT analysis first, followed by a PESTLE
analysis, to get a complete picture of the business landscape both in short and long-
term perspectives. The key purpose to identify the strategies both through SWOT and
PESTLE is that it will create a specific business model best aligned to organisation’s
resources and capabilities. In other words, it is the foundation for evaluating the
internal potential and limitations and the probable/likely opportunities and threats
from the external environment. Commonly quoted, SWOT Analysis is the salt of
strategy, it is used in most recipes. If that's the case then it is fair to say that PESTLE
is the pepper. They both gel and complement each other very well and the organisation
holds preventive strategies well in place.

3.2. 5 Check Your Progress

1. The acronym SWOT stands for:

a) Special Weapons for Operations Timeliness

b) Services, Worldwide Optimization and Transport

c) Strengths, Weaknesses, Opportunities and Threats

d) Strengths, Weakness, Online Availability and Treatments

2. The two internal elements of SWOT analysis for a business are:

a) Weaknesses and Threats b) Opportunities and Threats

c) Strength and Weaknesses d) Strengths and Threats

3. Which of the following is false regarding why a SWOT Analysis is used?

a) To build on the strengths of a business

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 b) To minimize the weaknesses of a business

c) To reduce opportunities available to a business

d) To counteract threats to a business

4. Which of the following could be a threat?

a) Changes in technology b) Market vacated by ineffective competitor

c) Location of your business d) Lack of marketing expertise

5. Which of the following could be an opportunity?

a) Having quality processes and procedures

b) Moving into new market segments that offer improved profits

c) Damaged reputation

d) A new competitor in your home market

6. Who usually conducts a SWOT Analysis for a business?

a) Financial Institutions/Banks b) Lawyers

c) Employees d) Managers

7. To whom the credit goes for introducing the concept of SWOT?

a) Albert Humphrey b) Tim Gilbertson

c) Henri Foyal d) Roger Binni

8. PESTLE was first cited by

a) Oliver Henry b) Francis Aguilar

c) James Smith d) Jacob Tyson

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9. What are the six elements of PESTLE?

a) Peace, Elements, Search, Tape, Legal, and Environment

b) Power, Environment, Science, Teaching, Legal, and Education

c) Political, Economic, Social, Technological, Legal, and Environmental

d) Paper, Element, Savings, Trust, Labels, and Entry

10. Which of the following are considered political elements of PESTLE?

a) Visa requirements and trading tariffs b) Weather and climate

c) Currency inflation and interests rates d) Age and gender

11. Used to describe a framework for the analysis of macro-environmental factors:

a) PEST / PESTLE Analysis b) SWOT Analysis

c) CASE Analysis d) All the above three

12. While looking at customer complaints, we are looking at our ______.

a) Strengths b) Weaknesses

c) Opportunities d) Threats

13. PESTLE matrix has _____ columns.

a) 5 b) 4

c) 6 d) 7

14. Which one of the following is not a “Social” pillar factor in PESTLE:

a) Age b) Population Rate

c) Interest Rates d) Education Level

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15. In above chapter’s text, a quote says : “SWOT Analysis is the salt of strategy,
then it is fair to say that PESTLE is the ________.

a) Cardamom b) Pepper

c) Clove d) Coriander

Answer Key:

1: c 2: c 3: c 4: a 5: b

6: d 7: a 8: b 9: c 10: a

11: a 12: b 13: c 14: c 15: b

3.2. 6 References for Further Reading

Agarwal, Ravi. Grassl, Wolfgang and Joy Pahl (2011). “Meta-SWOT: Introducing a
new strategic planning tool”. Journal of Business Strategy. Vol. 33 No. 2. Pp. 12-21

Aguilar Francis J. (1967): “Scanning the business environment”, Publisher:

Macmillan Co., New York

Dilip Roy (Editor) (1999) : “Strategic Management: Indian Experience”, Publishers :

Gyan Publishing House

Hooda Kalpana (2014): “A study on SWOT analysis of selected financial institutions

in India”, Asia Pacific Journal of Marketing & Management Review, Vol 3 (2), Pg :
114-125

50MINUTES.com and Brigitte Feys (2015) : “PESTLE Analysis: Understand and

plan for your business environment”, Publishers : 50Minutes.com

Rashain Perera (2017) : “The PESTLE Analysis”, Publishers : Nerdynaut

World Market Intelligence (2015) : A Study : DZ Bank AG : Company Profile and

SWOT Analysis

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Lesson No. 3: Break-Even Analysis

3.3.1 Concept of Break-Even Point (BEP)

3.3.2 Deriving a Break-Even Point (BEP)
3.3.2.1 BEP in Industrial Sector
3.3.2.2 Terms used in Calculation of BEP
3.3.2.3 Equivalent Terms in Banking Parlance
3.3.3 When is Break-Even Analysis used?
3.3.4 Benefits of Break-Even Analysis
3.3.5 Sensitivity Analysis
3.3.6 Let us Sum-Up

3.3.7 Check Your Progress

3.3.8 References for Further Reading

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3.3.1 Concept of Break-Even Point (BEP)

Profit planning is one of the important managerial functions of any enterprise and
banking is a service industry therefore, it is not exception for it. Break-even point
implies the level of business at which the firm's total income equals total
expenditure. It provides companies with minimum goals or targets to cover costs and
make a profit. In simpler words, Break-even point is calculation of that point of sales
or amount of sales or revenues an enterprise must generate in order to make it equal
to total costs associated with the production of the goods or services. This analysis
provides insight into whether or not revenue from a product or service has the ability
to cover the relevant costs of production of that product or service. Managers can use
this information in making a wide range of business decisions, including setting prices,
preparing competitive bids, and applying for loans with the financial institution.

In general, it is prevalent to study and calculate breakeven point in the manufacturing

sector only. If we go deep into the concept, it is level of business where sales equal to
costs or achieving a situation of ‘No Profit No Loss’. In this study we can calculate the
breakeven point of the banking sector. This concept can be visualised in banking also,
i.e., level of lending where the bank earns that amount which covers all associated
costs. This calculation is useful and important in risk management. Even it is useful
in risk identification and fixation of annual business targets. Banking institution
comes under service sector; they don’t produce any physical products. They provide
services like deposits and lending. There is some difference between lending and
deposit rates. While working out BEP for a bank, appropriate deposit and advance
amount, i.e., total business of the bank needs to be arrived at to derive a ‘no profit no
loss’ point. We can assume deposits rates as direct expenses and lending rates as
selling price. Such concept, if developed fully, can be worth consideration for strategic
decisions in banks.

3.3.2 Deriving a Break-Even Point (BEP)

Breakeven analysis is the relationship between cost, production volume and profits at
various levels of activity. With the help of some mathematical technique, one has to
arrive at a particular level of business, by achieving of which, entrepreneur will be able
to make that amount of profit which is sufficient to bear the costs involved in

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production – meaning thereby reaching a level of ‘No Profit No Loss’. To better
understand the concept and adopting that calculation’s formula in banking parlance,
we may explain both situations and terms involved therein separately as under:

3.3.2.1 BEP in Industrial Sector: Here are a few basic break-even point formulas
to help you calculate break-even point for your business. One is based on the number
of units of product sold and the other is based on the level of sales revenue generated
in monetary terms.

I) To calculate a BEP based on units: Divide fixed costs by the revenue per unit
minus the variable cost per unit. The fixed costs are those that do not change no matter
how many units are sold. The revenue is the price for which you’re selling the product
minus the variable costs, like labour and materials.

Break-Even Point (Units) =Fixed Costs ÷ (Revenue per Unit – Variable Cost per
Unit)

II) To calculate a BEP based on level of sales: Divide the fixed costs by the
contribution margin. The contribution margin is determined by subtracting the
variable costs from the price of a product. This amount is then used to cover the fixed
costs.

Break-Even Point (` sales) = Fixed Costs ÷ Contribution Margin

whereas: Contribution Margin = Price of Product – Variable Costs

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In the diagram above, the line OA represents the variation of income at
varying levels of advances, investments and other services provided to
customers. OB represents the total fixed costs of the branch. As output
increases, variable costs are incurred, meaning that total costs (fixed +
variable) also increase. At low levels of output, Costs are greater than
Income. At the point of intersection, P, costs are exactly equal to income,
and hence neither profit nor loss is made.

3.3.2.2 Terms used in Calculation of BEP

To get a better sense of what it means, take a detailed look at the formula components:

I) Costs: There are two distinct nature of costs that a business has to incur in its
normal operational activities – Fixed Costs and the Variable Costs.

Fixed Costs : These costs stay the same regardless of how many units the
company is producing. Fixed costs are not affected by the number of items sold
and include expenses which do not have to be paid periodically such as lease / rent,
insurance, utility bills and repairs paid for storefronts or production facilities,
computers, and software. Fixed costs also include fees paid for services like
graphic design, advertising, and public relations. In the long term, fixed costs can
also alter but perhaps as a result of expansion in production capacity (e.g adding a
new factory unit, etc.). However, in such situations, all kind of strategic viability
calculations will have to be done afresh.
Variable Costs: These costs, recurring in nature, are directly associated with the
number of units produced. As the business produces more and more goods and
services, these costs increase proportionately. For example, the cost of cloth and
other associated inputs required to produce a shirt total up to `100. These costs

usually include cloth, other material, labour, direct sales and promotion costs,
storage etc. If company produces 500 shirts, the total variable costs works out to
`50,000 (500*100). On the other hand, if the company produces zero shirt, the

total variable costs will comes down to `0 (100*0).

Semi-Variable Costs: Whilst the distinction between fixed and variable costs is
a convenient way of categorizing business costs. In reality there are some costs

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 which are fixed in nature but which increase when business reaches certain levels.
These are largely related to the overall "scale" and/or complexity of the business.
For example, when a business is at relatively low levels, it may not require costs
associated with HR management or a fully-equipped maintenance department.
However, as the scale of the business grows (e.g. output, number people employed,
number and complexity of transactions), then more space and resources are
required. In these circumstances, we say that part of the cost is variable and part
fixed.

II) Revenue: Revenue is the money that a business actually receives from its
customers for the provisions of goods and services produced during a particular period
Total revenue can be calculated by multiplying the sale price at which goods or services
are sold by number of units sold. In case the selling price of shirt is fixed at `400 and

number of shirts to be sold 500, which means the gross income is `2,00,000

(500*400).

III) Contribution Margin: Contribution margin can be calculated by subtracting

per unit variable costs (say `100) from the per unit revenue generated (say `400). The

contribution margin of (say `300) will be used for covering the fixed costs, and if there

is any money left after that, it will be net profit. It can be expressed on per unit basis
or total amount as per the formula used. It can also be expressed as a percentage of
net sales.

IV) Profit earned following your Break-Even: Once your sales equals or covers
your fixed and variable costs, you have reached the break-even point, and the company
will report a net profit or loss of `0. Any sales beyond that point shall contribute to net

profit of the company.

3.3.2.3 Equivalent Terms in Banking Parlance

By replacing traditional words of costs, incomes and profit used above with their
parallel in banking terminology, the BEP concept can be used in determining adequacy
levels of business for individual branches or bank as a whole. Such as:

 Variable cost is interest on deposits and borrowings.

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 Fixed costs are those management and operational cost which do not vary up to
some business level limitations (as more transactions would need more staff, more
commissions, more regulatory requirements and more branch area, etc.).
 Selling price can be compared with interest rates on lending and also investments.
 Total revenue as interest income plus non-interest income provided variation in
rate of interest are not there during effective period.

3.3.3 When is Break-Even Analysis used

 Starting a new business / branch: To start a new business, a break-even

analysis is a must. Not only it helps in deciding whether the idea of starting a new
business is viable, but it will force the startup to be realistic about the costs, as well as
provide a basis for the pricing strategy.
 Creating a new product: In the case of an existing business, the company
should still perform a break-even analysis before launching a new product—
particularly if such a product is going to add a significant expenditure.
 Changing the business model: If the company is about to the change the
business model, like, switching from wholesale business to retail business, then a
break-even analysis must be performed. The costs could change considerably and
breakeven analysis will help in setting the selling price.

3.3.4 Benefits of Break-Even Analysis

 Catch missing expenses: When you’re thinking about a new business, it’s very
much possible that you may forget about a few expenses. Therefore, a break-even
analysis can help you to review all financial commitments to figure out your break-
even point. This analysis certainly restricts the number of surprises down the road
or at least prepares a company for them.
 Set revenue targets: Once the break-even analysis is complete, you will get to
know how much you need to sell to be profitable. This will help you and your sales
team to set more concrete sales goals.
 Make smarter decisions: Entrepreneurs often take decisions in relation to
their business based on emotion. Emotion is important i.e. how you feel, though
it’s not enough. In order to be a successful entrepreneur, decisions should be based
on facts.
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 Fund your business: This analysis is a key component in any business plan. It’s
generally a requirement if you want outsiders to fund your business. In order to
fund your business, you have to prove that your plan is viable. Furthermore, if the
analysis looks good, you will be comfortable enough to take the burden of various
ways of financing.
 Better pricing: Finding the break-even point will help in pricing the products
better. This tool is highly used for providing the best price of a product that can
fetch maximum profit without increasing the existing price.

3.3.5 Sensitivity Analysis

Sensitivity analysis (SA) is the study of how the uncertainty in the output of a model
(numerical or otherwise) can be apportioned to different sources of uncertainty in the
model input. A related practice is uncertainty analysis which focuses rather on
quantifying uncertainty in model output. Ideally, uncertainty and sensitivity analysis
should be run in tandem.

In more general terms uncertainty and sensitivity analysis investigate the robustness
of a study when the study includes some form of statistical modeling. Sensitivity
analysis can be useful to banks for a range of purposes, including:

 Support decision making or the development of recommendations for decision

makers
 Enhancing communication from operational level to decision makers (e.g. by
making recommendations more credible, understandable, compelling or
persuasive);
 Increased understanding or quantification of a system (e.g. understanding
relationships between input and output variables); and
 Model development (e.g. searching for errors in the model).

Let us give an example: in any budgeting process there are always variables that
are uncertain. Future tax rates, interest rates, inflation rates, headcount, operating
expenses and other variables may not be known with great precision. Sensitivity
analysis answers the question, "if these variables deviate from expectations, what will
the effect be (on the business, model, system, or whatever is being analyzed)?"

A sensitivity analysis in business involves manipulating historical numerical data to

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determine how changes in that data will affect a possible future outcome. An example
would be to review the prices of individual components of an overall manufacturing
procedure and then change one of them to see what the possible end result may be.
This type of analysis is used to help manage risks.

The purpose of sensitivity analysis is to refine the decision model

• What makes a difference in each decision

• Provide guidance for the development of a requisite decision model

The break-even analysis and factors separation analysis give fair idea of the past
performance of the bank. In the light thereof the bank has to diagnose the past, look
into the future, anticipate the course of events and prepare strategies for improving
the productivity and operational efficiency of the bank. As part of the profit planning,
the bank should devise strategies for reduction of costs, maximization of revenues and
optimal utilization of all its resources including the human resources.

A technique used to determine how different values of an independent variable will

impact a particular dependent variable under a given set of assumptions. This
technique is used within specific boundaries that will depend on one or more input
variables, such as the effect that changes in interest rates will have on a bond's price.

Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out
to be different compared to the key prediction(s).Sensitivity analysis is very useful
when attempting to determine the impact the actual outcome of a particular variable
will have if it differs from what was previously assumed. By creating a given set of
scenarios, the analyst can determine how changes in one variable(s) will impact the
target variable.

3.3.6 Let us Sum-Up

Break-even is an important point of reference for finance professionals. A company or

project’s break-even point gives a valuable benchmark that helps to develop long-term
business plans. Break-even analysis is usually done as part of a business plan to see
the how practical the business idea is, and whether or not it is worth pursuing. A break-
even analysis is a financial tool which helps a company to determine the stage at which
the company, or a new service or a product, will be profitable. It is a situation where
an organisation is neither making money nor losing money, but all the costs have been
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covered. This technique is widely used by banks for estimating the viability of new
branches to be opened and also for converting loss making branches into profit making
branches. It is simply based on categorizing cost of funds between those which are
"variable" (costs that change when the volume of funds changes) and those that are
"fixed" (costs not directly related to the volume of funds). Total variable and fixed costs
are compared with the total revenue (interest income + non-interest income) in order
to determine the level of sales business (advances, investments, fee-based services) at
which the business makes neither a profit nor a loss (the "break-even point").

3.3.7 Check Your Progress

1. Which of the following are characteristics of B.E.P.?

a) No loss and no profit to the firm b) Total revenue is equal to total cost
c) Contribution is equal to fixed cost d) All of the above

2. While measuring break-even analysis, it is considered that during a specific period

there will be no change in general price level - labour, material and other overheads.

a) True b) False

3. Which of the following is a variable cost?

a) Interest payments b) Raw materials costs

c) Property taxes d) All of the above are variable costs

4. Which one is not included in the Break Even formula?

a) Variable costs per unit b) Total fixed costs

c) Cost price per unit d) Selling price per unit

5. In the graph, the breakeven point is obtained at intersection of

a) Total revenue and Total cost line b) Total cost and variable cost line
c) Variable cost and fixed cost line d) Fixed cost and total cost line

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6. Which of the following is/are limitations of break-even analysis?

b) Capital employed is taken into

a) It is a static concept
account
c) Limitation of non-linear behaviour of d) Limitation of presence of perfect
costs competition

7. Contribution is also known as:

a) Net Margin b) Contribution margin
c) Both a) and b) d) None of the above

8. Margin of safety is equal to:

a) Actual sales – Sales at Breakeven point
b) Actual sales + Sales at Breakeven point
c) Actual sales x Sales at Breakeven point
d) Actual sales / Sales at Breakeven point

9. Given selling price is Rs 10 per unit, variable cost is Rs 6 per unit and fixed cost is
Rs 5,000. What is break-even point?

a) 500 units b) 1,000 units

c) 1,250 units d) None of the above

10. What will be the impact on B.E.P. if fixed cost is increased?

a) Increase b) Decrease
c) No change d) None of the above

11. What will be the impact on B.E.P if variable costs are reduced?

a) Decrease b) Increase
c) No change d) None of the above

Answer Key:

1: d 2: a 3: b 4: c 5: a

6: a 7: b 8: a 9: c 10: a

11: a

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3.3.8 References for further Readings

Cafferky Michael E. and Wentworth Jon (2014): “Breakeven Analysis: The Definitive
Guide to Cost-Volume-Profit Analysis”, 2nd Edition, Publishers : Business Expert Press

Chandra P. (2010): “Fundamental of Financial Management”, Publishers : Tata

McGraw-Hill Education

McGee John (2014): “Break-even analysis”, Chapter in “Wiley Encyclopedia of

Management” - edited by Prof. Sir Cary L. Cooper, 3rd edition, Vol 12, Strategic
Management, Publishers : John Wiley & Sons

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Lesson No. 4: Developing Business Strategies

3.4.1 Introduction
3.4.1.1 What is Strategy and Planning?
3.4.1.2 Strategic Planning Types that create the best results
3.4.2 Strategic Management Process
3.4.2.1 Clarify Your Vision / Set your Goals
3.4.2.2 Gather and Analyse Information
3.4.2.3 Formulate a Strategy
3.4.2.4 Implement Your Strategy
3.4.2.5 Evaluate and Control
3.4.3 Why to adopt Business Development Strategies in Banks?
3.4.3.1 Top five retail banking strategies
3.4.3.2 Top five things a customer needs from their bank
3.4.4 Marketing Strategy for Banks
3.4.5 Let us Sum-Up

3.4.6 Check Your Progress

3.4.7 References for Further Reading

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3.4.1 Introduction

3.4.1.1 What is Strategy and Planning?

The term Strategy is derived from a Greek word "stratēgia" that refers to a general plan
to achieve one or more long-term or overall goals under conditions of uncertainty
(Wikipedia). The activities such as Strategic Planning or Strategic Thinking assume
importance because the resources available to achieve goals everywhere are usually
limited. Strategy generally involves, setting goals and priorities, determining actions
to achieve the goals, and mobilizing resources to execute the actions. A strategy
describes how the ends (goals) will be achieved by the means (resources). Professor
Richard P. Rumelt described strategy as a type of problem solving in 2011. He wrote
that good strategy has an underlying structure he called a kernel. The kernel has three
parts:

1) A diagnosis that defines or explains the nature of the challenge;

2) A guiding policy for dealing with the challenge; and
3) Coherent actions designed to carry out the guiding policy.

Strategic planning is a systematic way of making key business decisions, determining

the tactics and the implementation of actions that shape and direct the bank towards
the future, following its vision by defining the objectives and modalities of action.
Strategic planning is a basic premise of survival in the global market. It includes
guidance and redirection of existing business in the context of achieving a satisfactory
profit and growth. In fact, planning itself does not produce the results: it is a means,
not the final goal. Objective is to highlight the important issues in the banking industry
(Where are we now? Where we want to go? How to do it?). The purpose of adoption
of applicable model of strategic planning is that banks, regardless of the modalities of
implementation provides a competitive advantage in the market, which is manifested
by increasing quality of operations, profits and customer satisfaction. Before going
into details of strategic factors responsible for growth, we must understand the
process.

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3.4.1.2 Strategic Planning Types that create the best results

Planning always begins with performance. Organizations typically want to plan to

improve performance. Ventures need to transform themselves rather than following
same products and patterns, even with better efficiency. Transformational planning,
in contrast, is a more direct approach that directly challenges competition and initiates
change. Most organizations use one of following 3 types of strategic planning, but
determining which approach will work best depends on the desired outcome and the
company’s level of comfort with taking risks.

• Transactional: Transactional planning intends to sustain performance by simply

doing the same thing in a better way. This often involves a focus on increasing
efficiency by eliminating waste and improving how assets are utilized. But, it gets
obsolete over times.

• Forecasted transformational : Forecasted transformational planning analyzes

past performance and looks ahead, considering different patterns to forecast future
trends that can impact performance.

• Revolutionary transformational: Revolutionary transformational planning is

even bolder. It essentially creates the future by redefining industry and
regenerating an organization’s advantage. Organizations that embrace the
revolutionary mindset often operate with urgency and a sense of passion in shaping
and dictating the future.

An example of revolutionary planning would be the advent of mobile cellular phones,

which continue to change the way people communicate on a daily basis by introducing
new and previously unheard of technological advances.

3.4.2 Strategic Management Process

Today most organizations engage in strategic planning. Strategic planning is a way to

help an organization be more productive by helping guide the allocation of resources
in order to achieve goals. It is a strategic management tool. In other words it is a part
of strategic management. In fact, strategic planning is a key to successful strategic
management and sustain competitive advantages. Strategic management is the
continuous process of creating, implementing and evaluating decisions that enable an

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organization to achieve its objectives. Strategic management allows an organization to
be more proactive than reactive in shaping its own future; it allows an organization to
initiate and influence - rather than just respond to activities and thus to exert control
over its own destiny. The strategic management process is more than just a set of rules
to follow. It is a philosophical approach to business. Upper management must think
strategically first, then apply that thought to a process. The strategic management
process is best implemented when everyone within the business understands it.

The five stages of the process are goal-setting, analysis, strategy formation, strategy
implementation and strategy monitoring.

3.4.2.1 Clarify Your Vision / Set your Goals

The purpose of goal-setting is to clarify the vision for your business. This stage consists
of identifying three key facets: First, define both short- and long-term objectives.
Second, identify the process of how to accomplish your objective. Finally, customize
the process for your staff, give each person a task with which he can succeed. Keep in
mind during this process your goals to be detailed, realistic and match the values of
your vision. Typically, the final step in this stage is to write a mission statement that
succinctly communicates your goals to both your shareholders and your staff.

3.4.2.2 Gather and Analyse Information

Analysis is a key stage because the information gained in this stage will shape the next
two stages. In this stage, gather as much information and data relevant to
accomplishing your vision. The focus of the analysis should be on understanding the
needs of the business as a sustainable entity, its strategic direction and identifying
initiatives that will help your business grow. Both academics and practitioners have
employed SWOT as a strategic planning technique to investigate organizations’
positions, and accordingly develop their strategies. Examine any external or internal
issues that can affect your goals and objectives. Make sure to identify both the
strengths and weaknesses of your organization as well as any threats and opportunities
that may arise along the path.

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3.4.2.3 Formulate a Strategy

The first step in forming a strategy is to review the information gleaned from
completing the analysis. Determine what resources the business currently has that can
help reach the defined goals and objectives. Identify any areas of which the business
must seek external resources. The issues facing the company should be prioritized by
their importance to your success. Once prioritized, begin formulating the strategy.
Because business and economic situations are fluid, it is critical in this stage to develop
alternative approaches that target each step of the plan.

3.4.2.4 Implement Your Strategy

Successful strategy implementation is critical to the success of the business venture.

This is the action stage of the strategic management process. If the overall strategy
does not work with the business' current structure, a new structure should be installed
at the beginning of this stage. Everyone within the organization must be made clear of
their responsibilities and duties, and how that fits in with the overall goal.
Additionally, any resources or funding for the venture must be secured at this point.
Once the funding is in place and the employees are ready, execute the plan.

3.4.2.5 Evaluate and Control

Strategy evaluation and control actions include performance measurements,

consistent review of internal and external issues and making corrective actions when
necessary. Any successful evaluation of the strategy begins with defining the
parameters to be measured. These parameters should mirror the goals set in Stage 1.
Determine your progress by measuring the actual results versus the plan.

Monitoring internal and external issues through SWOT and STEP will also enable you
to react to any substantial change in the business environment. If you determine that
the strategy is not moving the company toward its goal, corrective actions could be
taken. If those actions are not successful, then repeat the strategic management
process. Because internal and external issues are constantly evolving, any data gained
in this stage should be retained to help with any future strategies.

3.4.3 Why to adopt Business Development Strategies in Banks?

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In simplest terms, business development can be summarized as the ideas, initiatives
and activities that help make a business better. In banking terms, better business
means:

 Business expansion within prescribed regulatory policies,

 Maintaining national and international norms and standards,
 Making and retaining customers with overall sense of safety and security
 Better Customer Service parallel to contented human resources
 Increased resources and better utilisation,
 Increasing profitability by maintaining inter-departmental / branch
coordination
 Making strategic business decisions to combat outside competition.

3.4.3.1 Top five retail banking strategies

A. Product Innovation

The bank’s database stores customers’ demographic and financial information. This
data helps banks in creating innovative personalized loan / deposit products for
various segments and categories of customers belonging to different regions. Constant
product innovation to match the behavioural change to meet the requirements of
customers is beneficial. Some areas where the banks are launching new and
personalized products are mutual funds, insurance, car loans, securities and dated
deposits, etc.

B. Quality of Service

Most retail banks offer similar services. If a customer discovers identical services
offered by another bank with better quality and lower costs, they will switch over
easily. Hence client’s experience and services offered by the bank matters the most.
Banks must come up with personalized products at low costs that satisfy and retain
customers, and help banks earn a profit.

C. Detailed Market Research

Banks can find untapped markets through dedicated and exhaustive market research.
They can pioneer products and services that others have not been implemented yet.
This gives them leverage and provides a competitive edge. This can be basis for

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identifying newer business areas and locations.

D. Multiple Delivery and Contact Channels

Customers prefer multiple means of communication to contact their banks. Therefore,

banks should provide high-quality service channels like mobile banking, internet
banking, web chat services, telephone banking, etc.

E. Understanding Customer Sentiment through Cross-channel Analysis

Banks can gauge what their customers think about their brand and offerings through
sentiment analysis. It provides them with insights to prepare for the upcoming
changes required to keep up with changing trends. The social media platforms like
Twitter, Facebook, and Instagram, Reddit, etc. display real-time customer
conversations. By analyzing, those banks can draw an accurate picture of their
expectations.

F. The retail banking sector can also implement more strategies such as using
advanced technology that includes cloud computing, Artificial Intelligence (AI) and
Natural Language Processing (NLP) software, skilled labour force, infrastructure
outsourcing, strategic cost management, maximum delivery channels, and business
process outsourcing, etc. This will help banks to improve their offerings and lead to
increased revenue generation.

3.4.3.2 Top five things a customer needs from their bank

With increasing commercialization, today’s customers expect a lot from their bank.
The challenge for financial institutions is to not only cater to all above customer
desires, but to differentiate themselves from the competition. Exceeding across key
customer wants is critical to acquiring new customers and retaining existing ones in
an environment of high switching and low loyalty. The question for banks is - how do
they provide plenty of options, remain highly responsive across every channel, offer
personalized experiences to everyone, and deliver great value for customers while
making it all look easy with green balance sheet?

Today’s digital savvy customers have a world of banking options available at a tap of
their phone – and they are ready to change banks if they don’t get the experience they
desire. When financial institutions understand what their customers really want,
banks and customers both win and gain. When thinking about the Future Banking
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Ecosystem keep in mind the following top five things customers want from their bank.

A. Customers want banking to be easy

It sounds straightforward, but easy banking with a great customer experience is

deceptively difficult. Accessing bank products and services should be a simple,
seamless experience – clean menus that don’t require countless clicks or tons of taps
to access basic banking tasks. If a customer is used to a mobile interface, they don’t
want to have to relearn how to bank on a different desktop or tablet display. Digital
transformation has dramatically boosted the number of interactions customers have
with their bank, mostly online or with a mobile device, increasing the importance that
engaging is easy. If a financial firm fails to make basic banking tasks simple and
unified, customers will move on to any other bank that does it.

B. Customers want options for how they bank

Ease isn’t enough – banking customers want 24/7 access and options: on the web at
home, on their phone on the go, at physical branches, and more. Today’s customers
operate across both digital and physical, with more than half of customers interacting
with their bank through multiple channels. Even the older, less technologically-
engaged demographics that prefer in-person banking are eager to include other
channels and expand their web or mobile-based interactions. Digital transformation
has enabled instant gratification across multiple industries, and bank customers
expect the same always-available, immediate access to banking with free transfers and
multiple withdrawals, free Dr/Cr cards, etc. Customers want to be able to start a
banking process online and not have to repeat information or tasks at a physical
branch. Providing many options and a seamless, easy experience across every avenue
can be challenging for banks, but it is critical to satisfying today’s customer

C. Customers want responsive customer service

Great service quality is a necessity, as customers have no reservations about switching

when they receive frustratingly opaque fines and fees or their bank fails to solve their
problems. Banks need to be transparent and communicate with their customers, and
if issues do arise they must act quickly to painlessly resolve them on the first try. A
third of banking customers report that poor customer service is the primary reason
they would leave their bank. For customers who have changed banks due to bad
service, over 80 percent opined that they could have been retained if their issue had
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been solved on their first contact with the bank. Though responsive customer service
may not win banks new customers, it is crucial to keeping existing ones.

D. Customers want to be better understood

Customers want individual attention and relevant offers from their bank, and not the
usual spam of generic ads. If a customer is researching new credit cards, a targeted
offer from their bank for a great deal on a card that is customized to what they are
looking for saves the customer time and money. Meanwhile, an offer for a Home
Equity Line of Credit rate sent to all of a bank’s customers is frustrating spam that just
turns most customers off. Customers want to be understood so much that they are
perfectly willing to trade personal data for tailored offerings. As more customers take
advantage of digital channels, they interact with their bank more – giving banks more
opportunities to better understand customer needs, to present more relevant offers at
the right time and place, and ultimately to increase retention while selling additional
products.

E. Customers want great value from their financial products and services

Customer loyalty program adoption is rising, but it’s not because customers are
actually more loyal to their bank. One-third of banking customers participated in at
least one loyalty program primarily to gain access to the “best deals.” Customers will
go anywhere they can find good value, with 27 percent of bank customers purchasing
or subscribing to a new financial product or service over the last six months –
regardless if the offering came from their current provider. To compete, banks must
go beyond personalization for existing customers and build great, high-value financial
offerings that attracts today’s savvy banking customers. Customers want convenience
and value, and they are willing to exchange their personal data for good deals and
discounts. Nearly half of customers want their banks to locate markdowns on
purchases of interest for them, providing banks with a tremendous sales opportunity.

3.4.4 Marketing Strategy for Banks

To formulate an effective marketing strategy, a bank should know:

 What is the total potential presently available and its present share in the total
market for deposits, advances and other services

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 Core customer segments i.e. which customers provide highest profit and
business potential, so that they always get the desired attention.
 Core products and services, i.e. which services or products best match the
requirements of customers in general and core customers in particular and provide
high business and profit potential, so that action is taken to improve such products
further to make them more acceptable.
 What products are supplementary products and keep the core products and
services, as high business and profit potentials?
 Core competitors, i.e. which competitors are posing major threat in serving the
core customer segments and which core products and services are they offering to
the clients, so that if possible, bank can explore the possibility of offering similar
products and services.
 Core appeal, i.e. which advantage should be offered and communicated to
customers in general to differentiate one’s own organization in terms of pricing,
servicing, conveniences etc.
 Potential products to suit the changing environment, so that they meet the
change in customer’s needs over a time period.
 Potential customers who could be brought to bank’s fold.
 Potential competitors who may erode bank’s market share, so that bank may
take action to change its strategies in time, to remain the market leader.
 Which other products are needed to be introduced to maintain or enhance the
existing business, so that the customer does not feel the necessity of shifting
his/her patronage elsewhere.
 How strong is the information system in the bank and what needs to be done
to create a prompt and accurate information system which forms core of any
marketing exercise?
 Customers like all human being, like to deal with people who care. Hence,
attitudinal change particularly in the staff at the counter, is needed to
understand that bank’s existence is due to customer and customer is really an
important visitor on Bank’s premises.
 Remember that current customers like to be rewarded for their loyalty. One
of the best ways to do this is to remember to include an offer with any cross-sell or

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 upsell message. Without an offer, you may be perceived as simply ‘pushing product’
without leveraging the relationship value already in place.

3.4.5 Let us Sum-Up

Every business would like to expand and earn more profits along the time. Increase in
business, may be through increase in turnover or increase in customer base, require
adoption of specific strategies, meticulous planning and proper implementation.
Marketing in banking means a coordinated organizational effort to reach the customer
to fulfill his/her specific needs for getting his/her patronage, through utilization of
people, products or services, price, promotion, branch outlets and distribution policies
for maximizing customer satisfaction. It needs to be understood that marketing is just
not the deposit mobilization and the concept has to be applied in line with
organizational objectives and meeting the challenges being faced. Every human being
wants to be recognized by someone in a crowd and when it is a question of attracting
affluent customers, providing personalized services has been found very effective. In
relationship banking, one particular staff is given the responsibility of providing all
banking services to a group of high potential customers identified for the purpose. End
result is achieved through inter-departmental coordination and adoption of strategies
that are mutually satisfying to the bank and the customers.

3.4.6 Check your progress

1. Strategic planning is formalisation of planning where plans are made

for:

a) Indefinite periods b) Medium periods

c) Short periods d) Long periods

2. Which of the following statements best describes strategic management?

a) A process consisting of determining objectives and strategic actions to achieve

those objectives
b) A process consisting of determining objectives, strategic actions to achieve those
objectives, the implementation of desired strategy, and the monitoring of that
strategy

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 c) A process consisting of the determination of direction, strategic actions to
achieve objectives, the implementation of desired strategy, and monitoring of
that strategy
d) A process for determining direction, strategic actions to achieve objectives, and
the implementation of desired strategy.

3. Strategic planning is done by which level of management?

a) Floor level management b) Middle level management

c) Top level management d) Both a) & b) together

4. Strategic planning is a _______ process.

a) Short term b) One time

c) Discrete d) Continuous

5. Strategic planning is the art & science of __________in regard to a

company’s overall long-term goals or desires.

a) Creating specific business strategies

b) Implementing specific business strategies
c) Evaluating results of executed plans
d) All of the above

6. The fundamental purpose of an organization’s mission statement is to :

a) Create a good human relations climate in the organization

b) Define the organization’s purpose in society
c) Define the operational structure of the organization
d) Generate good public relations for the organization

7. Which of the following is NOT a major element of strategic management process?

a) Formulating strategy b) Implementing strategy

c) Evaluating strategy d) Assigning administrative tasks

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8. The various organizational routines and processes that determine how efficiently
and effectively the organization transforms its inputs into outputs are called:

a) Strengths b) Core competencies

c) Capabilities d) Customer value

9. Which of the following is not an advantage of strategic management?

a) It provides organisations with a clearer sense of direction and purpose

b) It helps improve the political, economic, social and technological environment of
the organisation
c) It helps orientate management decisions to relevant environmental conditions
d) It helps organisations be proactive rather than reactive

10. Which one of the following is not a primary task of strategic managers?

a) Establishing strategic objectives

b) Defining the business and developing a mission
c) Developing, Implementing and evaluating the chosen strateg
d) Developing the steps to follow in implementing operational level plans

11. The three organizational levels are:

a) corporate level, business level, functional level

b) corporate level, business unit level, functional level
c) corporate strategy level, business unit level, functional level
d) corporate strategy level, business level, specialist level

12. Which individuals are most responsible for the success and failure of an
organization?

a) Strategists b) Financial planners

c) Personnel directors d) Stakeholders

13. Strategic management involves the_______, directing, _______ and controlling

of a company’s strategy-related decisions and actions.

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 a) Financing; marketing b) Planning; financing
c) Planning; organizing d) Marketing; planning

14. Strategic management process activate in the sequence of_______.

a) Environmental scanning, Strategy formulation, Implementation, control and

evaluation
b) Strategy formulation, Environmental scanning, Implementation, control and
evaluation
c) Environmental scanning, Strategy Implementation, formulation, control and
evaluation
d) Strategy formulation, Implementation, control, evaluation, Environmental
scanning

15. Strategic decisions are based on what managers_____________, rather than on

what they__________.

a) Know; forecast b) React to; anticipate

c) Forecast; know d) Compromise with; analyze

Answer Key:

1: d 2: c 3: c 4: d 5: d

6: b 7: d 8: b 9: b 10: d

11: a 12: a 13: c 14: a 15: c

3.4.7 References for further reading

David, F.R. (2003): “Strategic Management-Concepts and Cases”, 9th Edition, Pearson
Education, USA.

Dermine Jean (2008): “Banking Strategies and Risk Management”, A View From
INSEAD, France

Jeremy Kourdi (2015): “Business Strategy: A Guide to Effective Decision-Making”,

Publisher : The Economist; 3rd Edition

Rumelt Richard P. (2012) : “Good Strategy/Bad Strategy: The difference and why it
210
matters”, Strategic Direction, Vol. 28, No. 8. https://doi.org/10.1108 /sd.2012.
05628haa.002, Publishers : Emerald Group Publishing Limited

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 Unit 04: Use of Computers in Banking

Lesson No. 1 Introduction to Computers

Lesson No. 2 Components of Computers and their Functions

Lesson No. 3 Computer Operating Systems

Lesson No. 4 Computerisation and CBS Banking

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Lesson No. 1: Introduction to Computers

4.1.1 Introduction

4.1.2 What is Computer System?

4.1.3 Characteristics of a Computer

4.1.4 Computer Generations (First to Fifth)

4.1.5 Classifications of a Computer

4.1.6 Advantages of a Computer

4.1.7 Limitations of a Computer

4.1.8 What is Internet?

4.1.9 Lets us Sum-Up

4.1.10 Check Your Progress

4.1.11 References for Further Reading

4.1.1 Introduction

In the 18th and 19th centuries, the industrial revolution brought profound changes in the life
style of man. Many activities that were hitherto performed by man employing his hands and
his finger skill came to be carried at great speed and efficiency by machines. With the increase
in business, routine and repetitive clerical performances involving adding, subtracting,
multiplying, dividing numbers, and duplicating data/information from one source to
another, record keeping, maintaining accounts, attending/answering correspondence,
preparing vouchers, invoices, bills and multiple of such other functions grew manifolds. The
advent of mechanical calculating devices and later electronic computing in the West heralded
a new age and paved way for modern aged computers. As per the Oxford English Dictionary,
the word “computer” was first used in 1613 in a book called “The Yong Mans Gleanings” by
English writer Richard Braithwait.

A computer is an electronic device that manipulates information, or data. It has the ability to
store, retrieve, and process data. Computers come in many different shapes and sizes, from
handheld smartphones to supercomputers weighing more than 300 tons. Many people
throughout history are credited with developing early prototypes that led to the modern
computer. During World War II, physicist John Mauchly, engineer J. Presper Eckert, Jr., and
their colleagues at the University of Pennsylvania designed the first programmable digital
computer, the Electronic Numerical Integrator and Computer (EINAC).

It is an electronic device, operating under the control of instructions (software) stored in its
own memory unit, that can accept data (input), manipulate data (process), and produce
information (output) from the processing. Generally, the term is used to describe a collection
of devices that function together as a system. In other words “A computer is a device that
takes input such as numbers, text, sound, image, animations, video, etc., and converts it,
returning the processed input as output. All numbers, text, sound, images, animations, and
video used as input are called data, and all numbers, text, sound, images, animations, and
video returned as output are called information.” Most computers rely on a binary system
that uses two variables, 0 and 1, to complete tasks such as storing data, calculating algorithms,
and displaying information.
4.1.2 What is computer System?

Computer is referred to as a system because it is made up of integrated components (input,

output, storage and CPU) which work together to perform steps called for in the program
being executed.

Computer systems will include the computer along with any software and all kinds of
peripheral devices that are necessary to make the computer function efficiently. All these
components function together as a single unit to deliver the desired output.

4.1.3 Characteristics of a Computer

Speed: Computers work at very high speed and are much faster than humans. A second is
very large time period time for computer. A computer can perform billions of calculations in
a second. The time used by a computer to perform an operation is called the processing speed.
Computer speed is measured in Mega Hertz (MHz).

Storage: A computer can store a large amount of data permanently. User can use this data
at any time. We can store any type of data in a computer. Text, graphic, pictures, audio and
video files can be stored easily. The storage capacity of the computer is increasing rapidly.

Processing: A computer can process the given instructions. It can perform different types
of processing like addition, subtraction, multiplication and division. It can also perform
logical functions like comparing two numbers to decide which one is the bigger and so on.

Accuracy: Accuracy means to provide results without any error. Computers can process
large amount of data and generate error-free results. A modern computer performs millions
of operations in one second without any error.
Communication: Most computers today have the capability of communicating with other
computers. We can connect two or more computers by a communication device such as
modem. These computers can share data, instructions, and information. The connected
computer are called network.

4.1.4 Computer Generations

The history of computer development is often referred to in reference to the different

generations of computing devices. Each generation of computer is characterized by a major
technological development that fundamentally changed the way computers operate, resulting
in increasingly smaller, cheaper, more powerful and more efficient and reliable devices. Each
generation and the developments that led to the current devices that we use today, is given
below:

First Generation (1940-1956) Vacuum Tubes

The first computers used vacuum tubes for circuitry and magnetic drums for memory, and
were often enormous, taking up entire rooms. They were very expensive to operate and in
addition to using a great deal of electricity, generated a lot of heat, which was often the cause
of malfunctions.

First generation computers relied on machine language, the lowest-level programming

language understood by computers, to perform operations, and they could only solve one
problem at a time. Input was based on punched cards and paper tape, and output was
displayed on printouts.

The UNIVAC and ENIAC computers are examples of first-generation computing devices. The
UNIVAC was the first commercial computer delivered to a business client, the U.S. Census
Bureau in 1951.

Second Generation (1956-1963) Transistors

Transistors replaced vacuum tubes and ushered in the second generation of computers. The
transistor was invented in 1947 but did not see widespread use in computers until the late
1950s. The transistor was far superior to the vacuum tube, allowing computers to become
smaller, faster, cheaper, more energy-efficient and more reliable than their first-generation
predecessors. Though the transistor still generated a great deal of heat that subjected the
computer to damage, it was a vast improvement over the vacuum tube. Second-generation
computers still relied on punched cards for input and printouts for output.

Second-generation computers moved from cryptic binary machine language to symbolic,

or assembly, languages, which allowed programmers to specify instructions in words. High-
level programming languages were also being developed at this time, such as early versions
of COBOL and FORTRAN. These were also the first computers that stored their instructions
in their memory, which moved from a magnetic drum to magnetic core technology.

The first computers of this generation were developed for the atomic energy industry.

Third Generation (1964-1971) Integrated Circuits

The development of the integrated circuit was the hallmark of the third generation of
computers. Transistors were miniaturized and placed on silicon chips,
called semiconductors, which drastically increased the speed and efficiency of computers.

Instead of punched cards and printouts, users interacted with third generation computers
through keyboards and monitors and interfaced with an operating system, which allowed the
device to run many different applications at one time with a central program that monitored
the memory. Computers for the first time became accessible to a mass audience because they
were smaller and cheaper than their predecessors.

Fourth Generation (1971-Present) Microprocessors

The microprocessor brought the fourth generation of computers, as thousands of integrated

circuits were built onto a single silicon chip. What in the first generation filled an entire room
could now fit in the palm of the hand. The Intel 4004 chip, developed in 1971, located all the
components of the computer—from the central processing unit and memory to input/output
controls—on a single chip.

In 1981, IBM introduced its first computer for the home user, and in 1984 Apple introduced
the Macintosh. Microprocessors also moved out of the realm of desktop computers and into
many areas of life as more and more everyday products began to use microprocessors.

As these small computers became more powerful, they could be linked together to form
networks, which eventually led to the development of the Internet. Fourth generation
computers also saw the development of the mouse and handheld devices.

Fifth Generation (Present and Beyond) Artificial Intelligence

Fifth generation computing devices, based on artificial intelligence, are still in development,
though there are some applications, such as voice recognition, that are being used today. The
use of parallel processing and superconductors is helping to make artificial intelligence a
reality. Quantum computation and molecular and nanotechnology will radically change the
face of computers in years to come. The goal of fifth-generation computing is to develop
devices that respond to natural language input and are capable of learning and self-
organization.

4.1.5 Classification of Computers

Computers can be broadly classified by their speed and computing power.

Sr. Type Specifications

PC (Personal It is a single user computer system having a moderately

1 Computer) or powerful microprocessor. It is termed as a computer that is
Micro-Computers equipped microprocessor as its CPU.

It is also a single user computer system, similar to the PC,

2 Workstation
however, has a more powerful microprocessor.

It is a multi-user computer system, capable of supporting

3 Mini-Computer
hundreds of users simultaneously.

It is a multi-user computer system, capable of supporting

4 Main Frame hundreds of users simultaneously. Software technology is
different from minicomputer.

It is an extremely fast computer, which can execute hundreds

5 Super-Computer
of millions of instructions per second.

PC (Personal Computer)

A PC can be defined as a small, relatively inexpensive computer

designed for an individual user. PCs are based on the
microprocessor technology that enables manufacturers to put an
entire CPU on one chip. Businesses use personal computers for word
processing, accounting, desktop publishing, and for running
spreadsheet and database management applications. At home, the most popular use for
personal computers is surfing the Internet.

Although personal computers are designed as single-user systems, these systems are
normally linked together to form a network. In terms of power, nowadays high-end models
of the Macintosh and PC offer the same computing power and graphics capability as low-end
workstations by Sun Microsystems, Hewlett-Packard, and Dell.
Workstation
The workstation is a computer used for engineering applications
(CAD/CAM), desktop publishing, software development, and other
such types of applications which require a moderate amount of
computing power and relatively high-quality graphics capabilities.

Workstations generally come with a large, high-resolution graphics

screen, a large amount of RAM, inbuilt network support, and a graphical user interface. Most
workstations also have mass storage device such as a disk drive, but a special type of
workstation, called diskless workstations, comes without a disk drive.

Common operating systems for workstations are UNIX and Windows NT. Like PC,
workstations are also single-user computers like PC but are typically linked together to form
a local area network, although they can also be used as stand-alone systems.

Minicomputer

It is a midsize multi-processing system capable of supporting up to 250 users simultaneously.

Mainframe

The mainframe is very large in size and is an expensive computer

capable of supporting hundreds or even thousands of users
simultaneously. Mainframe executes many programs concurrently
and supports much simultaneous execution of programs.

Supercomputer

Supercomputers are one of the fastest computers currently

available. Supercomputers are very expensive and are
employed for specialized applications that require an
immense amount of mathematical calculations (number-
crunching). For example, weather forecasting, scientific
simulations, (animated)graphics, fluid dynamic
calculations, nuclear energy research, electronic design, and analysis of geological data (e.g.
in petrochemical prospecting).
4.1.6 Advantages of a Computer

 Speed: A computer can process data faster than any other machine designed to perform a
similar task.

 Repetitions: A computer can tirelessly perform the same operations millions of times in
exactly the same way without getting bored and tired the way a human clerk would.

 Accuracy: A computer's high-speed processing is accompanied by high-accuracy results.

No other system can have as much accuracy as a computer system.

 Logical Operations: The computer can make decisions based on some conditions and take
alternative course of action accordingly.

 Store and Recall Information: The computer is like human brain as it can store facts,
instructions and information and recall them when needed.

 Self-Checking: The computer verifies the accuracy of its own work by means of a parity
check.

 Self-Operating: Once the data and the program are fed into the computer’s memory, the
computer is capable of executing the instructions on its own, without human intervention.

4.1.7 Limitations of a Computer

 It is a machine. It is an inanimate object. It needs outside intervention for it to run. It can

only do things for which it is designed.

 It is Electronic. It is made up of electronic circuits. It runs on electrical energy.

 It is automatic. Once started, it continues to run without outside intervention.

 It can manipulate data, following specific rules. It can perform arithmetic functions such
as addition, subtraction, multiplication, and division. It can compare data.

 It has memory. It has the capacity to remember what it has done. It can store instructions
in its memory and follow these through unaided.
 It can also perform logical functions. It can be given a set of instructions that tell what it
must do and how it must do it. It can produce results upon completion of these operations
as instructed.

There are following limitations of a computer.

 Programmed by human: Though computer is programmed to work efficiently, fast

and accurately, but it is programmed by human beings to do so. Without a program,
computer is nothing. A program is a set of instructions. Computer only follows these
instructions. If the instructions are not accurate the working of computer cannot be
accurate.

 Thinking: The computer cannot think itself. The concept of artificial intelligence shows
that the computer can think. But still this concept is dependent on set of instructions
provided by the human beings.

 Self-Care: A Computer cannot care itself like a human. A computer is dependent on

human beings for this purpose.

 Retrieval of memory: A computer can retrieve data very fast but this technique is
linear. A human being's mind does not follow this rule. A human mind can think randomly
which a computer machine cannot.

 Feelings: It is a major limitation in the computer. A computer cannot feel about some
like a human. A computer cannot meet human in respect of relations. Human can feel,
think and caring but a computer machine itself cannot. A computer cannot take the place
of human because computer is always dependent on human beings.

 Others:

 A computer cannot generate information on its own.

 A computer cannot correct wrong instructions.

 A computer cannot come up with an original decision

4.1.8 What is Internet?

Internet, a system architecture that has revolutionized communications and methods of

commerce by allowing various computer networks around the world to interconnect.
Sometimes referred to as a “network of networks,” the Internet emerged in the United States
in the 1970s but did not become visible to the general public until the early 1990s. Tim
Berners-Lee invented the World Wide Web in 1989. HTML documents were transmitted over
the Internet by a web server to web browsers using Uniform Resource Locators.

The Internet is a vast network that connects computers all over the world. Through Internet,
people can share information and communicate from anywhere if they have communication
access. It is a global network of computers each computer connected to the Internet must
have a unique address. This address is known as an IP address.

4.1.9 Let’s us Sum-Up

A computer is an electronic device, operating under the control of instructions (software)

stored in its own memory unit, that can accept data (input), manipulate data (process), and
produce information (output) from the processing. Computer systems will include the
computer along with any software and peripheral devices that are necessary to make the
computer function. PC is an abbreviation for a Personal Computer, it is also known as a
Microcomputer. Supercomputers are the fastest and the most expensive computers. A server
is a central computer that contains collections of data and programs. Workstations are high-
end, expensive computers that are made for more complex procedures and are intended for
one user at a time. Microcontrollers are mini computers that enable the user to store data and
execute simple commands and tasks. The history of computer development is often referred
to in reference to the different generations of computing devices. Each generation of
computer is characterized by a major technological development that fundamentally changed
the way computers operate, resulting in increasingly smaller, cheaper, more powerful and
more efficient and reliable devices.

4.1.10Check Your Progress

1. Which is the smallest memory measurement unit in given options?

a) Byte b) Micro byte

c) Kilobyte d) Nibble

2. One Nibble has _______?

a) 2 Bits b) 4 Bits
 c) 8 Bits d) 16 Bits

3. One GB (Giga Byte) contains _______ bytes?

a) 1073741824 b) 1048576

c) 83886808 d) 8192

4. What is an Internet?

a) Network of Network b) Wide Area Network

c) Interconnected computers from the world d) All of the above

5. What is the full form of WWW?

a) World Wide Web b) World Wide Wave

c) World Web Websites d) None of these

6. What is the full form of IP?

a) Internet Progress b) Internet Protocol

c) Internet Pass d) Internet Password

7. The capacity to perform multiple tasks simultaneously is termed as ______.

a) Diligence b) Versatility

c) Reliability d) Any or all of the Above

8. A computer does not suffer from tiredness and lack of concentration. It is known as
_______.

a) Diligence b) Versatility
 c) GIGO d) None of the Above

9. Fourth Generation computers were based on _____________.

a) IC b) Vacuum tube

c) transistor d) Microprocessors

10. What kind of operations can a computer carry out?

a) Verbal and Logical b) Logical and Cognitive

c) Arithmetic and Logical d) Verbal and Arithmetic

11. Which of the following are indisputable characteristics of a computer?

a) Speed b) Accuracy

c) Versatility d) All of the above

12. Who first used the word “computer”?

a) Mark Twain b) Sherlock Holmes

c) Richard Braithwait d) Enid Blyton

13. In what form is the data expressed in a digital computer?

a) Binary b) Tertiary

c) Primary d) Secondary

14. Who invented the World Wide Web?

a) Robert Tappan b) Charles Babbage

 c) Tim Berners-Lee d) Niko Hodiko

15. What is the address given to each computer on the Internet known as?

a) Hardware number b) Device address

c) IP address d) NET address

Answer Key:

1: d 2: b 3: a 4: d 5: a

6: b 7: b 8: a 9: d 10: c

11: d 12: c 13: a 14: c 15: c

4.1.11 References for Further Reading

NCERT (2019) : “Computer Science - for Class XI”, National Council of Educational Research
and Training

Peter Norton (2005): “Introduction To Computers”, Special Indian Edition, Tata McGraw
Hill

Rajeev Khanna (2009): “Introduction to Computers”, Publishers: New age international (P)
Ltd.
Lesson No. 2: Components of Computers and their Functions

4.2.1 Introduction to Hardware and Software

4.2.1.1 Difference between Hardware and Software
4.2.1.2 Difference between System Software and Application Software
4.2.1.3 Difference between Application Software and Operating System
4.2.2 Functional Components of a Digital Computer
4.2.2.1 Input Unit

4.2.2.2 Central Processing Unit

4.2.2.3 Output Unit

4.2.3 Hardware Parts of a computer with their functions

4.2.3.1 Computer Case

4.2.3.2 Mother Board

4.2.3.3 Central Processing Unit

4.2.3.4 RAM – Random Access Memory

4.2.3.5 Graphics Card

4.2.3.6 Sound Card

4.2.3.7 Hard Drive

4.2.3.8 SSD – Solid State Drive

4.2.3.9Power Supply Unit

4.2.3.10Monitor

4.2.3.11 Key Board

4.2.3.12 Mouse

4.2.3.13 Common External Peripherals

4.2.4 Let us Sum-Up

4.2.5 Check Your Progress
4.2.6 References for Further Reading
4.2.1 Introduction to Hardware and Software

A computer is a combination of hardware and software resources which integrate together

and provides various functionalities to the user. Hardware are the physical components of a
computer like the processor, memory devices, monitor, keyboard etc. while software is the
set of programs or instructions that are required by the hardware resources to function
properly.

4.2.1.1 Difference between Hardware and Software

Computer Hardware: Hardware refers to the physical components of a computer.

Computer Hardware is any part of the computer that we can touch these parts. These are the
primary electronic devices used to build up the computer. Examples of hardware in a
computer are the Processor, Memory Devices, Monitor, Printer, Keyboard, Mouse, and the
Central Processing Unit.

Computer Software: Software is a collection of instructions, procedures, documentation

that performs different tasks on a computer system. We can say also Computer Software is a
programming code executed on a computer processor. The code can be machine-level code
or the code written for an operating system. Examples of software are Ms Word, Excel, Power
Point, Google Chrome, Photoshop, MySQL etc.

Hardware Software
Hardware is a physical parts computer that Software is a set of instruction that tells a
cause processing of data. computer exactly what to do.
It is manufactured. It is developed and engineered.
Hardware cannot perform any task without Software cannot be executed without
software. hardware.
As Hardware are physical electronic We can see and also use the software but
devices, we can see and touch hardware. can’t actually touch them.
It has four main categories: input device, It is mainly divided into System software,
output devices, storage, and internal Programming software and Application
components. software.
Hardware not affected by viruses. Software is affected by viruses.
It cannot be transferred from one place to
But, it can be transferred.
another electrically through network.
If hardware is damaged, it is replaced with If software is damaged, its backup copy can
 Hardware Software
new one. be reinstalled.
Ex: Keyboard, Mouse, Monitor, Printer, Ex: Ms Word, Excel, Power Point,
CPU, Hard disk, RAM, ROM etc. Photoshop, MySQL etc.

4.2.1.2 Difference between System Software and Application Software

System Software: System Software is the type of software which is the interface between
application software and system. Low level languages are used to write the system software.
System Software maintain the system resources and give the path for application software
to run. An important thing is that without system software, system cannot run. It is a
general purpose software.

Application Software: Application Software is a type of software which runs as per user
request. It runs on the platform which is provided by system software. High level languages
are used to write the application software. It is specific purpose software. The main
difference between System Software and Application Software is that without system
software, system cannot run on the other hand without application software, system always
runs.

System Software Application Software

System Software maintain the system
Application software is built for specific
resources and give the path for application
tasks.
software to run.
Low level languages are used to write the While high level languages are used to write
system software. the application software.
It is a general purpose software. While it is a specific purpose software.
Without system software, system can’t While without application software system
run. always runs.
System software runs when system is
While application software runs as per the
turned on and stop when system is turned
user’s request.
off.
Example of system software are operating Example of application software are
system, etc. Photoshop, VLC player etc.
System Software programming is complex Application software programming is
than application software. simpler as comparison to system software.
4.2.1.3 Difference between Application Software and Operating System

Application Software: Application Software is one of the type of software which runs or
executes as per user request. High level languages such as java, c, c++, etc. are used to develop
the application software. Application software is a specific purpose software which is
intended to perform some task grouped together. Without an operating system application
software cannot be installed. Its examples are Photoshop, VLC media player, Mozilla Firefox,
Opera, Google chrome etc.

Operating System: An operating system is a computer program, works as interface

between user and hardware and provides common services for computer programs. The
entire process or functionality of computer system depends on the operating system. It is
developed by using c++, c, and assembly languages.

An operating system performs some variety of tasks like, it manages files and directory
creation and deletion, process creation, deletion, synchronization, memory allocation and
deallocation. An operating system also prevents the computer system from unauthorized
access and secures the resources, information and data. Its examples are Microsoft Windows,
Linux, Unix, DOS. Overall, we can say that without an operating system a computer system
is nothing.

Application software Operating System

A system computer program that manages
A computer program which is intended
hardware and software resources and provides
to perform some task classified along.
common services for computer programs.
Application software is downloaded Operating system comes installed on the device
form internet. purchased.
It is developed by using virtual basic, It is developed by using c++, c, and assembly
c++, c, java. languages.
It is usually in Megabytes (MB). While it is usually is Gigabytes (GB).
It works as interface between user and
It is built to perform some specific hardware and perform some variety of tasks
tasks. like memory management, scheduling, process
management etc.
But it does not depend upon application
It always depends upon operating
software.it provides the path to execute or to
system.
run the application software.
It runs when the user desires to run the It boots up when the user wants and run until
 Application software Operating System
application. the user switches off the machine.
Its examples are Photoshop, VLC player Its examples are Microsoft Windows, Linux,
etc. Unix, and DOS.

4.2.2 Functional Components of a Digital Computer

A digital computer can be defined as a programmable machine which reads the binary data
passed as instructions, processes this binary data, and displays a calculated digital output.

4.2.2.1 Input Unit:

The input unit consists of input devices that are attached to the computer. These devices take
input and convert it into binary language that the computer understands. Some of the
common input devices are keyboard, mouse, joystick, scanner etc.

4.2.2.2 Central Processing Unit (CPU):

Once the information is entered into the computer by the input device, the processor
processes it. The CPU is called the brain of the computer because it is the control centre of
the computer. It first fetches instructions from memory and then interprets them so as to
know what is to be done. If required, data is fetched from memory or input device. Thereafter
CPU executes or performs the required computation and then either stores the output or
displays on the output device. The CPU has three main components which are responsible
for different functions – Arithmetic Logic Unit (ALU), Control Unit (CU) and Memory
registers:

 Arithmetic and Logic Unit (ALU): The ALU, as its name suggests performs
mathematical calculations and takes logical decisions. Arithmetic calculations include
addition, subtraction, multiplication and division. Logical decisions involve
comparison of two data items to see which one is larger or smaller or equal.
 Control Unit: The Control unit coordinates and controls the data flow in and out of
CPU and also controls all the operations of ALU, memory registers and also
input/output units. It is also responsible for carrying out all the instructions stored in
the program. It decodes the fetched instruction, interprets it and sends control signals
to input/output devices until the required operation is done properly by ALU and
memory.
 Memory Registers: A register is a temporary unit of memory in the CPU. These are
used to store the data which is directly used by the processor. Registers can be of
different sizes(16 bit, 32 bit, 64 bit and so on) and each register inside the CPU has a
specific function like storing data, storing an instruction, storing address of a location
in memory etc. The user registers can be used by an assembly language programmer
for storing operands, intermediate results etc. Accumulator (ACC) is the main register
in the ALU and contains one of the operands of an operation to be performed in the
ALU.

Memory attached to the CPU is used for storage of data and instructions and is called
internal memory. The internal memory is divided into many storage locations, each
of which can store data or instructions. Each memory location is of the same size and
has an address. With the help of the address, the computer can read any memory
location easily without having to search the entire memory. When a program is
executed, its data is copied to the internal memory and is stored in the memory till the
end of the execution. The internal memory is also called the Primary memory or Main
memory. This memory is also called as RAM, i.e. Random Access Memory. The time
of access of data is independent of its location in memory, therefore this memory is
also called Random Access memory (RAM).

4.2.2.3 Output Unit: The output unit consists of output devices that are attached with
the computer. It converts the binary data coming from CPU to human understandable form.
The common output devices are monitor, printer, plotter etc.

4.2.3 Hardware Parts of a computer with their functions

Here is a complete list of all the common computer hardware components and common
peripherals that get used with them.

4.2.3.1 Computer Case: This is the part that holds all of the internal components
to make up the computer itself. It is usually designed in such a manner to make fitting a
motherboard, wiring, and drives as easy as possible. Some are designed so well that it is easy
to make everything look tidy and presentable too. Cases come in all different shapes, colours
and sizes to accommodate various types of computer components and to satisfy the needs of
the consumer and look spectacular. Cases, like most things, vary in quality. You can get them
made from cheap metals or from good quality materials that provide you with a sturdy design.

4.2.3.2 Mother board: The motherboard is the main board that is screwed directly
inside the computer case. All other cards and everything else plugs directly into the
motherboard, hence its name. The CPU, RAM, drives, power supply and more all get
connected to it. Its function is to integrate all the components with each other so they can
communicate and operate together.

A good motherboard offers a wide amount of connectivity options. This allows all the
components to operate efficiently and to fulfil their maximum potential as they were designed
to do. Obviously, as the physical size of a motherboard is reduced, it begins to limit
connectivity options and functionality.

4.2.3.3 CPU: Central Processing Unit: The CPU is basically like the brain of a
computer. It processes all the information on a computational level. It takes information
from the RAM and processes it to perform the tasks required from the computer. It is usually
seated in a socket that utilizes a lever or a latch with a hinged plate with a cut out in the centre
to secure it onto the motherboard. It has many copper pads underneath it for the contacts of
the socket to push up against them to make electrical contact. There are other ways CPU’s
can be attached to the motherboard. Here are some common examples:
 ZIF (Zero Insertion Force): Although this a more desirable socket, they are mostly found
on older computer motherboards. A lever-operated a mechanism to clamp the pins of
the processor.
 PGA (Pin Grid Array): It is also a ZIF socket but has a different pin pitch and contains a
different pin count.
 LGA (Land Grid Array): More commonly found on motherboards today. A levered
hinged plate with a centre cut out clamps down on the processor.
 BGA (Ball Grid Array): The CPU is soldered directly onto the motherboard. This makes
it a non-user swappable part. It is susceptible to bad connectivity.

A processor generates a decent amount of heat, especially when it is working under high
loads. It will run even hotter when it is set to a higher clock speed in order to make it run
faster. This is called overclocking. This is why a heatsink and fan assembly is required in
order to draw the heat away from the processor and distribute it to thin sheets or fins of metal
for the fan to cool down.

There are so many different types of processors. The top manufacturers for computers are
Intel, AMD, and NVidia.

4.2.3.4 RAM: Random Access Memory: RAM is a data storage device that can
provide fast read and write access. RAM is also volatile which means that it loses all the stored
data the moment power is lost. The RAM keeps data ready for the CPU to process. The speed
of the RAM is a big contributor to the overall speed of a computer. It plugs directly into a
long slot which has contacts on either side of the slot. It too has a clock speed, just like a
processor. So, it can also be overclocked to deliver increased performance beyond the
intended specification. Certain RAM modules are sold with a heat spreader. It helps
dissipate the heat from the individual memory IC’s, keeping them cooler.

RAM has evolved like any other component. RAM used on the motherboard often makes use
of DDR (Double Data Rate) SDRAM (Synchronous Dynamic Random Access Memory) type
memory.

4.2.3.5 Graphics Card: A graphics card can also be referred to as a video card or a
display card. A computer graphics card processes the data from the motherboard and sends
the appropriate information to the monitor in order for it to be displayed. It takes the burden
of all the video processing from the main CPU. This gives a computer a big boost in
performance. It can do so using an HDMI, DisplayPort, DVI, or VGA connector.

A graphics card plugs into a PCI Express (Peripheral Component Interconnect Express) slot
on the motherboard. It is a serial expansion bus slot that is capable of a high amount of
bandwidth, in two directions. The amount of memory on the card varies depending on the
manufacturer’s design. A graphics card has a GPU (Graphics Processing Unit) which is the
main component, is slower than a CPU, but it is designed to deal with mathematical
operations required for video rendering. Because of the large processing requirements for a
gaming graphics card, it requires cooling and fans are almost a given.

Graphics cards use GDDR (Graphics Double Data Rate) SDRAM which is specially designed
to be optimized for graphics performance. GDDR is built to handle a higher bandwidth
compared to plain DDR ram. Windows is a GUI (Graphical User Interface) operating system.
Windows OS does not require a command to run. Only one mouse is required to run the
windows operating system.

4.2.3.6 Sound Card: Most of the time the sound chip built into the motherboard is
used for audio output. But, if you are a sound enthusiast or prefer higher detailed audio while
playing a game, you might be inclined to use a sound card. Sound cards plug into a computer
in multiple ways. It can be through USB, PCI slot, or PCI Express x 1 slot. A sound processing
chip on the card does all of the audio processing and is usually not a very powerful processor.
A sound card can offer a wide range of connectivity with various audio equipment.

4.2.3.7 Hard Drive: A hard drive is found in most computers. It is usually a mechanical
drive that stores all the data. Apart from storing data, it can also be used as a boot drive in
order to run the operating system from it. An operating system is a software program that
makes a computer useable; like Microsoft Windows.

The biggest vulnerability of a mechanical drive is the physically fragile nature of it. One bump
the wrong way can destroy a whole drive. A mechanical hard drive contains one or more
platters that spin anywhere between 5200 to 10000 RPM (revolutions per minute). The read
and write heads are spaced only about 0.002 (51 micro M) of an inch away from the platter.
This gives an idea about the physical limitations regarding its fragile nature. Small areas on
the platter can be arranged to represent a 1 or a 0. It can be changed using the drive head to
magnetically alter the material to represent the correct value.
4.2.3.8 SSD: Solid State Drive: An SSD is also a type of hard drive, but it doesn’t have
any moving parts. It consists of a bank of flash memory that can hold a reasonable amount
of data. While SSD’s are increasing in size all the time, they aren’t cost-effective for storing
large amounts of data. A mechanical drive has a cheaper gigabyte to dollar ratio. However,
the SSD is a high-performance drive. It’s fast and cannot be as easily damaged by dropping
it or taking a few knocks.

4.2.3.9 PSU (Power Supply Unit): A power supply mounts inside the computer case.
This converts the AC mains supply from the wall socket and supplies the correct DC voltages
to all the components inside the computer. A computer power supply supplies the following
voltages:

+3.3v: This voltage is supplied to the motherboard.

+5V: This voltage is supplied to the motherboard and other internal components.

+12V: This voltage is supplied to the motherboard and other internal components.

-12V: This voltage is supplied to the motherboard.

A power supply also comes with its own cooling fan. This helps all the internal components
to stay cool when the power supply is subjected to bigger loads.

4.2.3.10 Monitor: A monitor is what you use to see a visual representation of the
graphics data sent from the graphics card of the computer. There are various types of
monitors on the market. The most commonly used is a LED-backlit LCD monitor.

There are also a variety of different sizes with different aspect ratios. The aspect ratio is simply
the ratio between height and width. For example, a 16:9 aspect ratio monitor will have 16
parts wide to 9 parts in height. There are also curved monitors, but they are more expensive.
Monitors also have a fast response time in order to keep up with the high demands required
to eliminate delays with user input for gaming.

4.2.3.11 Keyboard: A keyboard is one of the ways to communicate with a computer. By

typing a key from the keyboard, it sends a small portion of data to tell the computer which
key was pressed. The computer can use this information in many ways. An example could be
a command or a character that can be used in a document. There are two main different types
of keyboards. Mechanical and membrane types.
4.2.3.12 Mouse: A mouse allows the user to move a pointer displayed on the monitor
and experience a more intuitive interaction with the computer. These days mouse have more
buttons than the common three. The three main buttons, however, allows the user to select,
grab, scroll and access extra menus and options. A computer mouse can be wired or wireless.
The latter obviously requires batteries. Optical mouse of today allow for very accurate
precision and smooth movement.

4.2.3.13 Common external peripherals: Here are some common peripherals that
get connected to a computer and extends its usefulness.

Printer: A printer can take an image sent by a computer and deliver it onto a sheet of paper.
It does this by using the data from the computer and by either using toner or ink, it deposits
one of these in a controlled and accurate manner to form the image.

Scanner: A scanner can take anything on a piece of paper and scan it to produce a replicated
digital image. This is also very handy for saving physical photos that you want to preserve.
Once the photo is stored digitally, it won’t decay as a physical photo does over time.

Speakers: Computer speakers can connect up to the sound card at the rear of the computer.
Another way they can be connected is by a monitor that already has built-in speakers.
Generally, the sound quality is poor from a monitor’ speakers. That’s why most people buy a
set of computer speakers to have on their computer desk. Use a pair of headphones if you
want more privacy with the sounds, or not to disturb the rest. Some earphones/headphones
these days even come built-in with a microphone, they can be used for phone calls.

4.2.4 Let us Sum-Up

A computer system consists of both hardware and information stored on hardware.

Information stored on computer hardware is often called software. The hardware
components of a computer system are the electronic and mechanical parts. The software
components of a computer system are the data and the computer programs. A piece of
computer software is a set of computer instructions that tell a computer how it should do
something. In simple language it is called “Programs”. There are two categories of programs.
Application programs (usually called just "applications") are programs that people use to get
their work done. Computers exist because people want to run these programs. The most
important systems program is the operating system. The Central Processing Unit (CPU) also
known as the processor is the heart, soul and brain of the computer. A motherboard is an
electronic circuit board in a computer which interconnects the hardware that's attached to it.

4.2.5 Check your Progress

1. Which is not a valid type of printer?

a) Dot Matrix b) Daisy Wheel

c) Inkjet d) OCR

2. Which can be the input and output devices both?

a) Scanner b) Touch Screen Monitor

c) Speaker d) Digitizer

3, What is the full form of USB?

a) Unique Synchronised Bus b) Universal Synchronised Bus

c) Universal Serial Bus d) Unlimited Sending Buffer

4. Which of the following options is correct about the windows operating system?

a) It is a CUI operating system b) It is based on CUI

c) It is a GUI operating system d) None of these

5. GUI Stands for

a) Graphical User Interface b) Greater User Interface

c) Graphical Union Interface d) Graphical User Internet

6. Data stored in RAM is :

b) Remains only a few minutes after the

a) Is only there while the power is on
power is turned off

c) Is permanent and only lost in power

d) Is Non-Volatile
failure

7. VDU Stands for ________?

a) Video Display Unit b) Visual Display Unit

c) Video Divide Unit d) None of the Above

8. Which is not an integral part of computer?

a) CPU b) Mouse

c) Monitor d) UPS

9. RuPay Card has been launched by ____?

a) IDBRT b) RBI

c) NPCI d) IBA

10. What is the full form of CPU?

a) Central Process Unit b) Central Processing Unit

c) Central Programming Unit d) Central Progressive Unit

11. What is the full form of SDRAM?

a) Special Dynamic Read Access Memory

b) Synchronous Dynamic Read Access Memory

 c) Special Dynamic Random Access Memory

d) Synchronous Dynamic Random Access Memory

12. Which part of the computer is considered as Brain of the Computer?

a) RAM b) CPU

c) ROM d) Hard Disk Drive

13. ATM Stands for

a) Automated Teller Machine b) Automatic Tele Machine

c) Automatic Transaction Machine d) Automatic Telling Machine

14. Who had conceived the idea of the first ever Graphical User Interface?

a) Steve Jobs b) Douglas Engelbart

c) Alan Kay d) Bill Gates

15. Which of the following comprise the input devices?

a) Keyboard b) Mouse

c) Both 1 and 2 d) Only 1

Answer Key:

1: d 2: b 3: c 4: c 5: a

6: a 7: b 8: d 9: c 10: b

11: d 12: b 13: a 14: c 15: c

4.2.6 References for Further Reading

Jain Satish (2016) : “Basic Computer Course Made Simple”, 3rd Updated Edition, Publisher:
BPB Publications

Ledin Jim (2020) : “Modern Computer Architecture and Organization”, Illustrated Indian
edition, Publishers : Packt Publishing Limited

Morris Mano M. (2017) : “Computer System Architecture”, 3rd Edition, Publishers : Pearson
Education

Young Roger (2018) : “How Computers Work: Processor and Main Memory”, Updated 2nd
Edition, Publishers : CreateSpace
Lesson No. 3: Computer Operating Systems

4.3.1 Introduction

4.3.2 What is Computer Operating System and its Services?

4.3.3 Types of Computer Operating Systems

4.3.3.1 Batch Operating System

4.3.3.2Time-Sharing Operating System

4.3.3.3Distributed Operating System

4.3.3.4Network Operating System

4.3.3.5Real Time Operating System

4.3.3.6Batch Operating System

4.3.4 Functions of Operating System

4.3.5 Let us Sum-Up

4.3.6 Check Your Progress

4.3.7 References for Further Reading

4.3.1 Introduction

An Operating System acts as a communication bridge (interface) between the user and
computer hardware. The purpose of an operating system is to provide a platform on which a
user can execute programs in a convenient and efficient manner. It is a piece of software
that manages the allocation of computer hardware. The coordination of the hardware must
be appropriate to ensure the correct working of the computer system and to prevent user
programs from interfering with the proper working of the system. Example: Just like a boss
gives order to his employee, in the similar way we request or pass our orders to the Operating
System. The main goal of the Operating System is to make the computer environment more
convenient to use and the secondary goal is to use the resources in the most efficient manner.
An Operating System performs all the basic tasks, e.g. managing files, processes, and
memory. Operating system acts as manager of all resources, i.e. resource manager. Thus,
the operating system becomes an interface between user and machine.

17.2 What is Computer Operating System and its Services?

An operating system is a program on which application programs are executed and acts as a
communication bridge (interface) between the user and the computer hardware. The main
task an operating system carries out is the allocation of resources and services, such as
allocation of: memory, devices, processors and information. The operating system also
includes programs to manage these resources, such as a traffic controller, a scheduler,
memory management module, Input/output programs, and a file system. Some of the
services provided by operating system to the computer system in one form or the other are
given hereunder:

Program Execution: The Operating System is responsible for execution of all types of
programs whether it be user programs or system programs. The Operating System utilises
various resources available for the efficient running of all types of functionalities.
Handling Input/Output Operations: The Operating System is responsible for
handling all sort of inputs, i.e. from keyboard, mouse, desktop, etc. The Operating System
does all interfacing in the most appropriate manner regrading all kind of Inputs and
Outputs. For example, there is difference in nature of all types of peripheral devices such
 as mouse or keyboard, then Operating System is responsible for handling data between
them. Booting is a process to restart the computer. After restarting, there is no software
in the computer's main memory.
Manipulation of File System: The Operating System is responsible for making of
decisions regarding the storage of all types of data or files, i.e, floppy disk/hard disk/pen
drive, etc. It decides as how the data should be manipulated and stored.
Error Detection and Handling: The Operating System is responsible for detection of
any type of error or bug that can occur during any task. The well secured OS also acts as
countermeasure for preventing any sort of breach to the Computer System from any
external source and probably handling them.
Resource Allocation: The Operating System ensures the proper use of all the resources
available by deciding which resource to be used by whom for how much time. All the
decisions are taken by the Operating System.
Accounting: The Operating System tracks an account of all the functionalities taking
place in the computer system at a time. All the details such as the types of errors occurred
are recorded by the Operating System.
Information and Resource Protection: The Operating System is responsible for
using all the information and resources available on the machine in the most protected
way. The Operating System must foil an attempt from any external resource to hamper
any sort of data or information.

All these services are ensured by the Operating System for the convenience of the users to
make the programming task easier. All different kinds of Operating System more or less
provide the same services. Microsoft Windows is an operating system that was developed by
Microsoft Company. The Microsoft Windows is available in 32-bits and 64-bits in the market.

4.3.3 Types of Computer Operating Systems

An Operating System performs all the basic tasks like managing files, processes, and memory.
Thus operating system acts as the manager of all the resources, i.e. resource manager. Thus,
the operating system becomes an interface between user and machine. Some are single-user
operating system means those operating systems in which only one user can access the
computer system at a time, and Ms-DOS is its best example. Some are sharing Operating
Systems, like Windows, etc. Some widely used operating systems are as follows:
4.3.3.1 Batch Operating System –

This type of operating system does not interact with the computer directly. There is an
operator which takes similar jobs having the same requirement and group them into batches.
It is the responsibility of the operator to sort jobs with similar needs.

Advantages of Batch Operating System:

It is very difficult to guess or know the time required for any job to complete.
Processors of batch systems know how long the job would be when it is in queue
Multiple users can share the batch systems
The idle time for the batch system is very less
It is easy to manage large work repeatedly in batch systems

Disadvantages of Batch Operating System:

The computer operators should be well known with batch systems

Batch systems are hard to debug
It is sometimes costly
The other jobs will have to wait for an unknown time if any job fails

Examples of Batch based Operating System: Payroll System, Bank Statements, etc.

4.3.3.2 Time-Sharing Operating Systems –

Each task is given some time to execute so that all the tasks work smoothly. Each user gets
the time of CPU as they use a single system. These systems are also known as Multitasking
Systems. The task can be from a single user or different users also. The time that each task
gets to execute is called quantum. After this time interval is over OS switches over to the next
task.
Advantages of Time-Sharing OS:

Each task gets an equal opportunity

Fewer chances of duplication of software
CPU idle time can be reduced

Disadvantages of Time-Sharing OS:

Reliability problem
One must take care of the security and integrity of user programs and data
Data communication problem

Examples of Time-Sharing OSs: Multics, Unix, etc.

4.3.3.3 Distributed Operating System –

These types of the operating system is a recent advancement in the world of computer
technology and are being widely accepted all over the world and, that too, with a great pace.
Various autonomous interconnected computers communicate with each other using a shared
communication network. Independent systems possess their own memory unit and CPU.
These are referred to as loosely coupled systems or distributed systems. These system’s
processors differ in size and function. The major benefit of working with these types of the
operating system is that it is always possible that one user can access the files or software
which are not actually present on his system but some other system connected within this
network i.e., remote access is enabled within the devices connected in that network.
Advantages of Distributed Operating System:

Failure of one will not affect the other network communication, as all systems are
independent from each other
Electronic mail increases the data exchange speed
Since resources are being shared, computation is highly fast and durable
Load on host computer reduces
These OSs are easily scalable as many systems can be easily added to network
Delay in data processing reduces

Disadvantages of Distributed Operating System:

Failure of the main network will stop the entire communication

To establish distributed systems the languages used are not well defined yet
These types of systems are not readily available as they are very expensive. Not only
that the underlying software is highly complex and not understood well yet

Examples of Distributed Operating System - LOCUS, etc.

4.3.3.4 Network Operating System –

These systems run on a server and provide the capability to manage data, users, groups,
security, applications, and other networking functions. These types of operating systems
allow shared access of files, printers, security, applications, and other networking functions
over a small private network. They themselves are not application software. One more
important aspect of Network Operating Systems is that all the users are well aware of the
underlying configuration, of all other users within the network, their individual connections,
etc. and that’s why these computers are popularly known as tightly coupled systems.

Advantages of Network Operating System:

Highly stable centralized servers

Security concerns are handled through servers
New technologies and hardware up-gradation are easily integrated into system
Server access is possible remotely from different locations and types of systems

Disadvantages of Network Operating System:

Servers are costly

User has to depend on a central location for most operations
Maintenance and updates are required regularly

Examples of Network Operating System are: Microsoft Windows Server 2003, Microsoft
Windows Server 2008, UNIX, Linux, Mac OS X, Novell NetWare, BSD, etc. The Linux
operating system is an open-source operating system made up of a kernel. It is a very safe
operating system.

4.3.3.5 Real-Time Operating System –

These types of OSs serve real-time systems. The time interval required to process and respond
to inputs is very small. This time interval is called response time. Real-time systems are used
when there are time requirements that are very strict like missile systems, air traffic control
systems, robots, etc. Two types of Real-Time Operating System which are as follows:

Hard Real-Time Systems: These Operating Systems are meant for applications where
time constraints are very strict and even the shortest possible delay is not acceptable. These
systems are built for saving life like automatic parachutes or airbags which are required to be
readily available in case of any accident. Virtual memory is rarely found in these systems.

Soft Real-Time Systems: These Operating Systems are for applications where for time-
constraint is less strict.

Advantages of Real-Time Operating System:

Maximum Consumption: Maximum utilization of devices and system, thus more

output from all the resources
Task Shifting: The time assigned for shifting tasks in these systems are very less. For
example, in older systems, it takes about 10 microseconds in shifting one task to another,
and in the latest systems, it takes 3 microseconds.
Focus on Application: Focus on running applications and less importance to
applications which are in the queue.
Real-time operating system in the embedded system: Since the size of programs are
small, RTOS can also be used in embedded systems like in transport and others.
Error Free: These types of systems are error-free.
Memory Allocation: It is best managed in these types of systems.

Disadvantages of Real-Time Operating System:

Limited Tasks: Very few tasks run at the same time and their concentration is very less
on few applications to avoid errors.
Use heavy system resources: Sometimes the system resources are not so good and
they are expensive as well.
Complex Algorithms: The algorithms are very complex and difficult for the designer
to write on.
Device driver and interrupt signals: It needs specific device drivers and interrupts
signals to respond earliest to interrupts.
Thread Priority: It is not good to set thread priority as these systems are very less prone
to switching tasks.
Examples of Real-Time Operating Systems are: Scientific experiments, medical imaging
systems, industrial control systems, weapon systems, robots, air traffic control systems, etc.

4.3.4 Functions of Operating System

Security – The operating system uses password protection to protect user data and
similar other techniques. It also prevents unauthorized access to programs and user data.
Control over system performance – Monitors overall system health to help improve
performance. Records the response time between service requests and system response
to have a complete view of the system health. This can help improve performance by
providing important information needed to troubleshoot problems.
Job accounting – Operating system Keeps track of time and resources used by various
tasks and users, this information can be used to track resource usage for a particular user
or group of user.
Error detecting aids – Operating system constantly monitors the system to detect
errors and avoid the malfunctioning of computer system.
Coordination between other software and users – Operating systems also
coordinate and assign interpreters, compilers, assemblers and other software to the
various users of the computer systems.
Memory Management – The operating system manages the Primary Memory or Main
Memory. Main memory is made up of a large array of bytes or words where each byte or
word is assigned a certain address. Main memory is a fast storage and it can be accessed
directly by the CPU. For a program to be executed, it should be first loaded in the main
memory. An Operating System performs the following activities for memory
management:

It keeps tracks of primary memory, i.e., which bytes of memory are used by which user
program. The memory addresses that have already been allocated and the memory addresses
of the memory that has not yet been used. In multi programming, the OS decides the order
in which process are granted access to memory, and for how long. It allocates the memory
when the process requests it and deallocates the memory when the process has terminated
or is performing an I/O operation.

Processor Management – In a multi programming environment, the OS decides the

order in which processes have access to the processor, and how much processing time
 each process has. This function of OS is called process scheduling. An Operating System
performs the following activities for processor management.

Keeps tracks of the status of processes. The program which perform this task is known as
traffic controller. Allocates the CPU that is processor to a process. De-allocates processor
when a process is no more required.
Device Management – An OS manages device communication via their respective
drivers. It performs the following activities for device management. Keeps tracks of all
devices connected to system. Designates a program responsible for every device known as
the Input/output controller. Decides which process gets access to a certain device and for
how long. Allocates devices in an effective and efficient way. Deallocates devices when
they are no longer required.
File Management – A file system is organized into directories for efficient or easy
navigation and usage. These directories may contain other directories and other files. An
Operating System carries out the following file management activities. It keeps track of
where information is stored, user access settings and status of every file and more… These
facilities are collectively known as the file system.

4.3.5 Let us Sum-Up

The fundamental goal of a Computer System is to execute and coordinate user programs and
to make tasks easier. Various application programs along with hardware systems are used to
perform this work. The system software is a type of computer program designed to run
hardware and software programs on a computer. According to some definitions, system
software also includes system utilities, system restore, development tools, compilers, and
debuggers. Operating System is software that manages and controls the entire set of
resources and effectively utilizes every part of a computer. It acts as the manager of all the
resources, i.e. resource manager. It performs all the basic tasks like managing files,
processes, and memory. Major functions of Operating Systems are task distribution, control
over system performance, security, and management of device, processor, memory and files,
etc.
4.3.6 Check Your Progress

1. What is the mean of the Booting in the operating system?

a) Restarting computer b) Install the program

c) To scan d) To turn off

2. Which is the Linux operating system?

a) Private operating system b) Windows operating system

c) Open-source operating system d) None of these

3. Which of the following is a single-user operating system?

a) Windows b) MAC

c) MS-DOS d) None of these

4. Which of the following is not application software?

a) Windows 8 b) WordPad

c) Photoshop d) MS-Excel

5. What is Microsoft window?

a) Operating system b) Graphics program

c) Word Processing d) Database program

6. Which of the following is system software?

a) Operating system b) Compiler

c) Utilities d) All of the above

7. Which of the following is not an operating system?

a) Windows b) Linux

c) DOS d) Oracle

8. Which type of operating system process data at actual time?

a) Real time operating system b) Batch processing operating system

c) Time sharing operating system d) Instant response operating system

9. Where an Operating System keeps the information of files?

a) FFT – File Folder Table b) FAT – File Allocation Table

c) FIT – File Index Table d) DIT – Directory Index Table

10. Which is not an Operating System?

a) Windows b) Macintosh

c) Open Office d) Linux

11. An Operating System is a type of?

a) System Software b) Application Software

c) Utility Program d) None of these

12. What does an Operating System do?

a) Memory Management b) File Management

c) Application Management d) All of the above

13. Which among the following is NOT a web browser?

a) SpaceTime b) NeoPlanet
 c) Sputnik d) MeeGo

14. Which of the following is the dominant Operating System in the world?

a) MacOS b) Microsoft

c) Linux d) None of the above

15. In the Windows XP, what does XP stands for?

a) Extra-Powerful b) Experience

c) Extended Platform d) Experience Platform

Answer Key:

1: a 2: c 3: c 4: a 5: a

6: d 7: d 8: a 9: b 10: c

11: a 12: d 13: d 14: b 15: b

4.3.7 References for Further Reading

Jain Satish and Geetha N. (2021) : “Computer Organization and Operating System”,
Publishers : BPB Publications

Silberschatz Abraham, Galvin Peter B., Gagne Greg (2008) : “Operating System Concepts”,
8th Edition, Publishers : Wiley

Nutt Gary (1997) : “Operating Systems: A Modern Perspective”, United States Edition,
Publishers : Pearson
Lesson No. 4: Computerization and CBS Banking

4.4.1 Introduction

4.4.2 Technology Products in a Banking Sector

4.4.3 Types of Computers Used in Banks

4.4.3.1 Mainframe Computers

4.4.3.2Mini Computers

4.4.3.3Personal Computers

4.4.4 Types of Computerisation in Banks

4.4.4.1 Back Office Application

4.4.4.2Total Branch Automation (TBA)

4.4.4.3Core banking Solutions (CBS)

4.4.4.4 Additional Functionalities of CBS

4.4.5 Application Software used in Core Banking Solutions

4.4.5.1 Application Server

4.4.5.2Data Base Server

4.4.5.3ATM Server

4.4.5.4Internet Banking Data Base Server

4.4.6 Advantages of Core Banking Solutions

4.4.7 National Financial Switch (NFS)

4.4.8 Let us Sum-Up

4.4.9 Check Your Progress

4.4.10 References for Further Reading

4.4.1 Introduction

Indian banking has accepted computerisation since 1993, more out of sheer compulsion and
necessity to cope up increasing overload and incompatibility of the manual system to sustain
further growth. Computers allow banking personnel to efficiently carry out regular, day-to-
day operations like transactions, process customer needs, forecast future trends, prepare
internal and external reports, communicate with key participants and generate profits. The
biggest impact is in the area of competition. Entry of new banks resulted in a paradigm shift
in the ways of banking in India. Small banks can access same technology as large banks and,
therefore, can compete with them more effectively for business. The growing competition,
growing expectations led to increased awareness amongst banks on the role and importance
of technology. The arrival of foreign/private banks with their superior state-of-the-art
technology-based services pushed Indian Banks also to follow suit by going in for the latest
technologies so as to meet the threat of competition and retain their customer base.

Embracing new technology and re-designing procedures resulted not only in the ease of
transactions but in the costs associated. Some investigations demonstrate that a bank spends
an average of Rs 40 for each transaction conducted at a branch. If ATM facility is used, the
cost drops to Rs 18-20 per transaction, but it is much higher than the cost involved in online
banking - for e-banking it is Rs 5 whereas the cost of transaction drops to Rs 1.50-Rs 2 if a
customer uses mobile banking.

4.4.2 Technology Products in a Banking Sector:

Over the years, technology has helped banks to evolve many new products/ services to suit
the growing needs of their customers. To name a few:

Mobile/Phone
Internet Banking Anywhere Banking Banking

ATMs Funds Transfer (e-Cheques)

e-Monies Electronic Fund Transfer Debit / Credit Cards

Online tax Payments Utility Bill Payments Instant Alerts

Card to Card Funds Transfer Smart Money Order

Ticket Bookings Shopping Mobile Recharges

 Flow of statistical information among banks and also RBI / NABARD / Govt.

4.4.3 Types of Computers Used in Banks

Banking computers include large mainframe computers--which are often large enough to fill
entire rooms--to smaller, hand-held personal digital assistants.

4.4.3.1 Mainframe Computers

Mainframe computers used in banking institutions store data pertaining to client records,
domestic operations and other vital processing information. A large bank with numerous
branches may have a mainframe computer in its central headquarters and linking terminals
located in each of its branches. One of the greatest advantages of a mainframe computer for
the banking sector is its ability to perform time-sharing. Time-sharing allows multiple users
to access the same computer (and its resources) simultaneously. Mainframe computers have
incredibly fast data-processing speeds and in-built fault tolerance mechanisms, reduce
labour costs, and support a wide range of workloads and uninterrupted processing. According
to "Understanding Computers: Today and Tomorrow, Comprehensive," mainframe
computers are sometimes referred to as enterprise-class servers or high-end servers.

4.4.3.2 Mini Computers

Minicomputers are a class of computing machines that range in size between large mainframe
computers and smaller, personal computers. They function as Internet servers and network
servers in banking operations. According to "Telecommunications: A Beginner's Guide,"
minicomputers allow banks to shift from centralized to distributed processing. Banks use
minicomputers as file storage systems, to run email systems and perform Internet operations.
The typical minicomputer is capable of supporting more than 64 terminals.

4.4.3.3 Personal Computers

Individual users typically employ personal computers to carry out operations. Personal
computers, or microcomputers, either function as part of a larger wide area network (WAN)
or local area network (LAN), or as independent, self-contained, devices. PCs used in the
banking sector are programmed to run spreadsheet, word processing and database software,
in addition to web browsers and email clients. Microcomputers typically used in banks
include tablet PCs, notebooks and laptops, desktop computers, palmtop computers,
programmable calculators and personal digital assistants.

4.4.4 Types of Bank Computerisation

4.4.4.1. Back Office Application

The first step of RBI towards bank computerisation, was implementation of the Back office
application in the banking sector. The Back office application uses computers only for data
entry operations and a few calculative operations. It also stores customer’s data and uses dos
base FoxPro to calculate interest and develop the pay roll system to calculate the employees’
salary. This application was not beneficial to the banks customers as it was not providing
them any kind of service. Due to this system the working hours of bank employees were
increased due to daily data entry of all / few manual transactions. It is also observed that in
this system daily / weekly / monthly back up was required. In case of failure in backup files,
management may not get proper information at a given point of time. Overall observation is
that, the back office application was not that beneficial to bank employees as well as bank
customers.

4.4.4.2 Total Branch Automation

Another step taken by RBI was Total Branch Automation in which the branches should have
a single customer ID concept using which all the accounts of the customer can be retrieved.
The bank should start collecting the customer-related information for customer information
system. Also training the employees in the areas of customer relationship, marketing at the
customer touch points should be started. In case of TBA bank can also provide ATM facility,
but that ATM facility is restricted to that branch only which is provide ATM centers. In TBA,
data centre is not established, hence customer’s data is available only at particular branch.
So customer can withdraw their cash only at particular branch’s ATM centre in which the
customer has his/her account. Due to this restriction although the ATM facility is available
customer cannot take the advantage of anywhere banking. In TBA, each branch needs to take
the back up of their data and send the same data backup copy in the form of soft copy on CD
or pen drive or by using any storage device to the head office of the bank. Nowadays many
cooperative banks are still working on total branch automation system. It indicates that TBA
is more convenient method of bank transaction as compare to back office application.

4.4.4.3 Core Banking Solutions (CBS)

After the turn of consolidated databases (Back office Application) and networks (Total
Branch Automation) the next term is core banking applications. Core banking applications
in banks provide the complete front-end and backend automation of banks. These
applications also help the banks to achieve centralized processing of each and every service
of customer. Core banking applications provide anywhere, anytime 24 X 7 non-stop services
which is not possible with traditional localized branch automation systems. These
applications also provide automation across multiple delivery channels.

CBS is a well-accepted concept adopted by all banks now. It is a centralized system that
provides accounting, customer information management and transaction processing
functions. It provides a central operational database to bank’s assets and liabilities, a
transaction processing engine and a system for the financial management of the bank. In
CBS, a branch becomes a service outlet like an ATM booth. Thus, importance of physical
branches is reduced. In case of core banking, customer can operate their account from
different locations like- customer can open an account at one location and can deposit a
cheque, check bank balance, withdraw cash, get demand draft, get account statement,
transfer funds, other transactions from different locations or different cities. Implementation
of core banking in banking sector allows inter connectivity of branches with the centralised
data centre.

Basically, core banking means performing accounting transactions like depositing,

withdrawals , availing loan, repayment of bills, statement of account etc. through the multiple
delivery channels like ATMs, Internet banking, and new branches. .For the last couple of
years the focus is on Core banking. With the implementation of core banking systems across
banks, the usage level of IT for customer management has increased. The Core banking
system has enabled banks to launch & targeting new products and services at specific
customer segment, after understanding their banking and investment requirements. Core
banking therefore all about knows the customer’s needs. It is providing them with the right
products at the right time, through the right channels, 24 hours a day 7 days a week.
4.4.4.4 Additional Functionalities of CBS

A super breed of core banking systems has emerged, which offer functionality in addition to
core banking. These systems, called universal banking systems, can accommodate
combinations of banking services such as retail, wholesale, private banking and securities
trading. An advantage of using a universal system is that the data can be transferred easily
between the different modules, so a bank can identify customer trends or selling
opportunities. For example if a customer has high levels of cash balances and also performs
securities trading then there may be a sales opportunity for private banking services. A
disadvantage is that it is unlikely that a single vendor is able to offer modules that are ‘best of
breed’ in each function. The alternative approach is to use a core banking system and
supplement its functionality by using ‘best of breed’ packages for the specific functionality
needed such as foreign exchange trading or portfolio management etc. The following
modules are offered by the CBS:

Customer information files management: This module provides centralised access to

all customer-related information. This transaction allows the bank to change the information
fields without modifying the underlying software.

Deposit management: This transactional module offers automated, real-time posting and
highly efficient deposit processing for all the balance-based liability products. It also provides
back up support for opening, settling, and closing card and check account contracts.

Loan management: Loan management is an automated process for many lending

products like secured and unsecured loans. It helps the bank in creating a flexible / tailor-
made product portfolio and streamlining the processes according to the customer’s need.

4.4.5 Application Software used in Core Banking Solutions

The advancement in technology, especially Internet and information technology has led to
new ways of doing business in banking. These technologies have cut down time, working
simultaneously on different issues and increasing efficiency. The platform where
communication technology and information technology are merged to suit core needs of
banking is known as core banking solutions. Here, computer software is developed to
perform core operations of banking like recording of transactions, passbook maintenance,
interest calculations on loans and deposits, customer records, balance of payments and
withdrawal. This software is installed at different branches of bank and then interconnected
by means of communication lines like telephones, satellite, internet etc. Many banks
implement custom applications for core banking. Others implement/customize commercial
ISV packages. While many banks run core banking in-house, there are some which use
outsourced service providers as well. There are several Systems integrators like Capgemini,
Accenture, IBM and HP which implement these core banking packages at banks.

There are different vendors in the market providing CBS. The software, (CBS) is developed
by different software development companies like Infosys, TCS, Ifl ex Solutions etc. Each of
the software has different names:

Name of the Vendor Software Name of the Vendor Software

Infosys Finacle I-Flex Solutions Flex Cube

TCS Quartz HCL Technologies Bankmate

Apart from the above, some institutions have developed their software in house.

Core banking solutions (CBS) is a combination of an application software and network

devices. There is a Central Data Centre. Data Centre is a large data housing infrastructure
that provides high band width access to its clients. The Data Centre houses many services,
Networking devices, Firewalls and other related equipment. Along with Data base servers,
the application software resides in a Central application server which is located in the Central
Office Data Centre. The application software is not available at the branch but can be
accessed from the branches. All of the branches of the bank are connected to the Central
Data Centre.

The server is a sophisticated computer that accepts service requests from different machines
which are called clients. The requests are processed by the server and sent back to the clients.
There are different types of servers as follows:-

Application Server, Data Base Server, Anti-Virus Server, Web Server, ATM Server, Internet
Banking Application Server (IBAS), Internet Banking Data base Server, Proxy Server, Mail
Server, etc. The firewall is generally hardware and it plays the role of preventing
unauthorized access. The servers though located in the same place will not be in the same
Local Area Network (LAN). These servers are segregated by using the concept of Virtual Area
Network (VLAN). VLAN has got its own security.

4.4.5.1 Application server

It hosts the core banking application like Finacle, Flex Cube, Quartz or Bankmate, etc. This
server has to be a powerful and robust system as it has to perform all the core banking
operations. The branch does not have the entire application. It will have only a version which
is called the “client version” of the application. The client version of the application is capable
of only entering the data at the end point that is branches. The application software which is
in the application server is always to be a latest version as accepted after adequate testing;
the application software is never static and would require some changes to be effected either
due to any bugs discovered or a change in this process or any other justified reason. The
latest copy of the software would always have a backup copy.

The application server would be placed in a trusted inside zone in a separate Virtual Local
Area Network (VLAN). There is no direct access to the application server. The
communication has to pass through a firewall, properly directed by a switch which is also
located behind the firewall.

4.4.5.2 Data Base server

Data base Server of the Bank contains the entire data of the Bank. The data would consist of
various accounts of the customers, as also certain master data e.g., master data are – base
rates FD rates, the rate for loans, penalty criteria under different circumstances, etc.
Application software would access the data base server. The data contained in the data base
has to be very secure and no direct access would be permitted to prevent unauthorised
changes. Strict discipline is followed regarding the maintenance of the data base server.
There is a designated role for maintenance of the data base. This individual who performs the
role is called the Data Base Administrator. His activities will also be monitored as all changes
made would be recorded in a Log. Scrutiny of the log would disclose the type of activities and
the effect of such activities. Security aspects of data base server are an audit concern. Apart
from normal application server, Automated Teller Machine server (ATMS) and Internet
Banking Application Server (IBAS) would also access the Data Base Server.
However, it would be only through VLAN. It must be noted that whatever be the operation
that the customer has performed, etc., at the branch, through ATM, by Internet, mobile
banking or any other alternate delivery channels his account at the Centralised Data Base
would be updated.

4.4.5.3 ATM server

ATM Server contains the details of ATM account holders. Soon after the facility of using the
ATM is created by the Bank, the details of such customers are loaded on to the ATM server.
When the Central Data Base is busy with central end-of-day activities or for any other reason,
the file containing the account balance of the customer is sent to the ATM switch. Such a file
is called Positive Balance File (PBF). Till the central data base becomes accessible, the ATM
transactions are passed and the balance available in the ATM server. Once the central data
base server becomes accessible, all the transactions that took place till such time as the central
data base became un-accessible would be updated in the central data base. This ensures not
only continuity of ATM operations but also ensures that the Central data base is always up-
to-date. Most of the ATMs are attached to central network and their control is through ATM
SWITCH only.

4.4.5.4 Internet Banking Data Base Server

It stores the user name, password of all the internet banking customers IBDS (Internet
Banking Data Base Server) software stores the name and password of the entire internet
banking customers (Please note that the ATM server does not hold the PIN numbers of the
ATM account holders). IBDS server also contains the details about the branch to which the
customer belongs. The Internet Banking customer would first have to log into the bank’s
website. The next step would be to give the user name and password. The Internet Banking
software which is stored in the IBAS (Internet Banking Application Server) authenticates the
customer with the log in details stored in the IBDS. Authentication process as you know is a
method by which the details provided by the customer are compared with the data already
stored in the data server to make sure that the customer is genuine and has been provided
with internet banking facility.
The IBDS is located in a demilitarised zone. It has a separate VLAN that connects a proxy
server, mail server, web server and IBAS.

4.4.6 Advantages of Core Banking Solutions

Data base Advantages

• More rugged no need for external indexing

• Data corruption possibilities are very low

• More Secured and restricted access

• Better Performance with Stored Procedures

• Better Data Integrity and Concurrency

• Easier Data Administration and Backups

• Improved and Efficient Data Structures

• Highly Scalable from Mega to Terra capacity

• Image Data Storage using Blob Data types

Functional Advantages

 Make internal staff more competent

 Minimising Human Intervention to limit human error
 Help to prevent fraud & theft with real time banking facilities
 Reduces operational cost
 Aids in studying charging customers demand
 Facilitation decision making through reporting and analysis

Improved and Revised Processes

• Multiple Postponements of Clearing

• Recording of Post Dated Cheques

• Drill-down facilities on Customer Ledger

• Internal Reconciliation of Fund Accounts

• Future Date Standing Instruction Schedules

• Auto Log-offs for idle workstations

• User Configurable and Multilingual Customer Intimations or Notices

• GUI and Color effects for effective handling

Special Facilities for Loan

• Deferred installment Loans

• Rescheduling of NPA or Bad Loans

• Special or Discretionary Interest Rates

• Interest Application based on Credit Ratings

• Multiple Interest Rates within same facility

• Multiple Commodity Pledge and Release

• Membership information thru softcopy

• Pre-intimation on new probable NPAs

Reports for Decision Support

• Movement Analysis for Term Deposits

• Performance monitoring of Cash Credits

• Term Loans Recovery Performance for Rebates

• Graphical Analysis of Trial Balance and P&L Account

• Interest Provisions for any date

• Projected Over dues, NPAs and expected recoveries

• Interest waiver for Onetime Settlements, Court Orders for Interest concessions

• Future Maturity patterns of Deposits and Loans

• Average Cost of funds and Earnings on Loans

 Advance Facilities

• Any Branch at par Payment and Collections

• Interfacing of ATMs with different protocols

• Mobile Banking with SMS based alerts

• Touch Screen or Keyboard based Kiosks

• RF based remote Extension Counters

• Information Feeds for Internet Portal

• Tele-Banking with user defined Scripting

Back End Handling

• Consistent Performance due to well defined objects

• ANSI Standard queries hence backend independent

• Direct capture of Image data - Signature/Photo

• Snapshot Backups at user defined intervals

• Automated Audit Trails and alerts mechanism

• More exhaustive User Profiles, limits and controls

• IP Sockets based remote interfacing with database

Efficient Processes

• Cash Dockets with multiple account effects

• Strong OBC, IBC, Remittances systems

• Cascaded Transactions for Fixed Deposit Maturity

• Automated Transaction Uploads from Softcopies

• Pre-stored Batches and Lot Transfers

• Hot-Keys for quick response to Customer Queries

• Easier Transaction Acquisition Processes

• Easier Configuration of Passbook, FDR printing Client ID Concept

• Customer Identified by Customer ID

• Single point acquisition of signature/photo

• More exhaustive Customer Profile

• Customer wise due Receivables and alerts

• Customer profiling and statistical analysis

• Easier compliance of TDS and KYC

• Monitoring of Critical Parameters

• Easier monitoring of Group Loans and NPA

• Better control over dormant customers remote monitoring of Policies

4.4.7 National Financial Switch

National Financial Switch (NFS) is the largest network of shared automated teller machines
(ATMs) in India. It was designed, developed and deployed by the Institute for Development
and Research in Banking Technology (IDRBT) and launched on 27 August 2004, with the
goal of inter-connecting the ATMs in the country and facilitating convenience banking. The
IDRBT collaborated with Euronet Worldwide and Opus Software to build a platform to allow
banks to connect their own switches to the NFS. The NFS consisted of an inter-ATM switch
and an e-commerce payment gateway. Now, it is run by the National Payments Corporation
of India (NPCI). NPCI is an umbrella organisation for operating retail payments and
settlement systems in India, It is an initiative of Reserve Bank of India (RBI) and Indian
Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act,
2007, for creating a robust Payment & Settlement Infrastructure in India.
4.4.8 Let us Sum-Up

While the foreign banks operating in India made the beginning, the private sector banks
aggressively started pursuing technology-based service offering. The rapid strides made by
the technology sector and their swift adoption by the competitors since the middle of the past
decade have forced the public sector banks also to get into the act by beginning to offer IT-
facilitated products and services. Today, almost every commercial bank branch is at some
stage of technology adoption, be it Automated Ledger Posting Machines, Total Branch
automation or Core Banking Solution (CBS). ATMs (including shared ATMs aided further by
the National Financial Switch Initiative of RBI), internet banking, branch banking, credit
cards, debit cards, etc. are being increasingly offered. Adoption of a structured IT
Governance framework would enable a bank to perform its business in an orderly and
effective manner benefiting the customers and, in the process, aid in its own survival and
growth. It requires adoption as well as continuous improvements both in hardware and
application software by the implementing banks to meet divergent needs of vast customer
base.

4.4.9 Check Your Progress

1. What is the full form of CBS?

a) Core Banking Solution b) Core Banking Software

c) Core Banking System d) Core Banking Service

2. Core Banking is a ____________ branch computerisation model.

a) decentralized b) centralized

c) unified d) Stand Alone

3. ________ is a technology that allows you to access your bank account from a mobile
device.

a) Home banking b) Mobile banking

 c) Internet banking d) Television banking

4. Information Technology Act was introduced in the year __

a) 1996 b) 2004

c) 2000 d) 2008

5. Which of the following is the other term used for Software hosting?

a) Cloud computing b) On demand service

c) Software as a service or SAAS d) All of the Above

6. Total Branch Automation offers its customers a facility of banking from any of the
branch irrespective of its location of parent branch.

a) True b) False

c) Can’t Say

7. Whenever you put your ATM card in your own bank’s ATM machine, it checks card
holders name and PIN number in ATM Server of the CBS.

a) True b) False

c) Can’t Say

8. Which of the following modules is not offered at CBS platform?

a) Customer information files management b) Deposit management

c) Cash Verification d) Loan management

9. Which of the following is not an advantage of CBS:

a) Any Branch at par Payment and Collections

b) Data corruption possibilities are very low

c) Operational cost is increased

d) Human Intervention is minimised

10. National Financial Switch is a network of shared ATMs. It was launched by:

a) Inst. for Development and Research in Banking Technology (IDRBT)

b) National Payments Corporation of India (NPCI)

c) Reserve Bank of India (RBI)

d) Indian Bank’s Association (IBA)

Answer Key:

1: a 2: a 3: b 4: c 5: d

6: b 7: b 8: c 9: c 10: a

4.4.10 References for Further Reading

IIBF Mumbai (2019) : “Digital Banking”, Indian Institute of Banking & Finance, Publishers
: Taxmann Publications Private Limited

Mittal R. K. and Dhingra Sanjay, (2007) : “Technology in Banking Sector: Issues and
Challenges”, Vinimay, Vol. XXVII, No. 4

RBI Publications (2020) : Report on trend and progress of banking in India, RBI, various
years, available at www.rbi.org.in.

Revathy Sriram M. (2013) : “Core Banking Solution: Evaluation of Security and Controls”,
2nd Edition, Publishers : Prentice Hall India Learning Private Limited

Subbiah A. and Jeyakumar S. (2009) : “Customer service in commercial banks in India : A

study with reference to core banking”, Vinimay, Vol. XXIX, No.3
Note: In case any discrepancies observed in the module, may be communicated to
C-PEC at cpecforccs@gmail.com.