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Articles

ROLE OF EMOTIONAL INTELLIGENCE IN RELATIONSHIP BETWEEN DIFFERENT LEVELS OF EMPLOYEES

Sudha Ganesan

BANK CUSTOMER SATISFACTION FOR BANCASSURANCE PRODUCTS IN INDIA

Palanisamy Balamani Banudevi

STRATEGIES TO ENTER NEW MARKETS – MERGERS & ACQUISITION AND TECHNOLOGICAL ADVANCES

Ruchi Tripathi, Sharad Tripathi

LINE AND STAFF: ACRITICAL ISSUE IN ADMINISTRATION OF WAGES AND SALARY AS A FACTOR OF MOTIVATION

Antigha Okon Bassey

PROFITABILITY AND CREDIT CULTURE OF NPAS: AN EMPIRICAL ANALYSIS OF PSBs

Namita Rajput

CORPORATE SOCIAL RESPONSIBILITY IN MALAYSIA: THE ROLE OF CORPORATE SECTOR IN SUPPORTING THE COMMUNITY AND THE ENVIRONMENT

Abdullah Sarwar, S.M. Ferdous Azam

www.theinternationaljournal.org > RJCBS: Volume: 02, Number: 03, January-2013 Page 1

Role of Emotional Intelligence in Relationship between different levels of

Employees

P.SANGEETHA, Assistant Professor

Meenatchi Ramaswamy Arts and Science College

Dr.G.SUDHA, Assistant Professor in Business Administraion

Annamalai University

Abstract

An organization goal can be achieved only when the people put in their best efforts.

Employees need feelings are considered for commitment. People are giving more importance to

emotional intelligence than their knowledge. Organizations expect employees have to understand their

own emotions, understanding others emotions and they have to act according to that. This paper

focuses on the role of emotional intelligence between different levels of employees.

Introduction:

An organization goal can be achieved only when the people put in their best efforts.

Employees need feelings are considered for commitment. It has been formed that organization with

more committed employees term to do more effective then less committed employees, but it is argued

that different level of employees are engaged in many transaction each seeking to obtain the favorable

return on investment.

Modern organizations are fast changing, if we analyses, deeply the common problem faced by

many organization. The organization are adopting and adapting to repaid change and the constant need

for innovation and improvement. Organization is also growing global and striving for performance

improvement with a diverse workforce.

Review of Literature:

According to Farrell and Petersen (1992), according to item the political behaviors in

organization “are those activities that are not repaired as part of one’s formal role in the organization

but that influence or attempt to influence the distribution of advantages and disadvantage within the

organization.

It may include by passing action of command, with holding organization, lobbying wring

pressure factices “firing” people, sabotaging, protest or won calling side when important decision

have to be made.

Commitment could define as the relation strength of an individual’s identification and

generalized value of loyalty and duty are viewed as its key determinants.

EMOTIONAL INTELLIGENCE (EI) is currently a hot topic in management consulting and

leadership training circles. As an example, when the Harvard Business Review printed an article on EI

in 1998, it gained a greater percentage of readers than any previously published article in that journal

for the last 40 years. In the early 1990s, science writer for the New York Times on brain and behavior,

Dan Goleman, began investigating the topic. In 1995, his book, Emotional Intelligence, was published

and became a widely read and much-cited reference. Since that time, there has been plenty of

excitement, confusion, and raised eyebrows with respect to emotional intelligence in general and, more

specifically, EI and its value as a corporate training objective.

EI is now considered fundamental for getting along in the workplace and is a primary

leadership and managerial competency. Health care lends itself to having leaders with high EI. Some

of the most significant problems facing society are health-related. Health administrators must contend

with providing quality service to their customers during a period of limited fiscal and human resources.

How do we give access to our health care delivery system when there is a large percentage of the


population with no ability to pay? The bioethical considerations surrounding human genetics, patient

protection, and privacy necessitates having health care administrators who can look beyond the

immediate need for answers and understand the potential long-term impact on individuals. Having the

sensitivity to recognize these very human issues and to act on them in an effective manner requires a

leader with high EI.

The term emotional intelligence (EI) had not been coined in 1981, but James Dozier provided a

vivid example of what it is: “The ability to perceive and express emotion, assimilate emotion in

thought, understand and reason with emotion, and regulate emotion in the self and others” (Mayer,

Salovey, & Caruso, Cherniss.Chapter1 4/24/01 7:47 AM Page 3 2000, p. 396; for an extended

discussion of the varied definitions of emotional intelligence, see Chapter Two). Dozier’s experience

illustrates emotional intelligence in action. He perceived accurately the emotional reactions of his

captors, and he understood the danger that those reactions posed for him. He then was able to regulate

his own emotions, and by expressing those emotions effectively, he was able to regulate the emotions

of his captors.

Emotional intelligence (EI) involves the ability to carry out accurate reasoning about emotions and the

ability to use emotions and emotional knowledge to enhance thought.

What Is Emotional Intelligence?

The term “emotional intelligence” has been employed on an occasional basis at least since the

mid-twentieth century. Literary accounts of Jane Austen’s Pride and Prejudice refer to various

characters possessing this quality (Van Ghent 1953, p. 106–107). Scientific references date to the

1960s. For example, emotional intelligence had been mentioned in relation to psychotherapy

treatments (Leuner 1966) and to promoting personal and social improvement more generally (Beasley

1987, Payne 1986). During the 1980s, psychologists expressed a renewed openness to the idea of

multiple intelligences (Gardner 1983, Sternberg 1985). Simultaneously, research on emotion and on

how emotions and cognition interacted were on the ascendancy (for historical background, see

Matthews et al. 2002, Mayer 2000, Mayer et al. 2000a, Oatley 2004). It was amid such lively inquiry

that scientific articles on EI first began to appear (Mayer et al. 1990, Salovey & Mayer 1990).

Interest in studying EI grew dramatically throughout the late 1990s, propelled by a

popularization of the topic (Goleman 1995).With the term’s newly found cachet, and with the

excitement surrounding the identification of a potential new intelligence, many used the term—but

often in markedly different ways (Bar-On 1997, Elias et al. 1997, Goleman 1995, Mayer & Salovey

1993, Picard 1997). So, what does the term “emotional intelligence” really mean?

EQ is a driving force in the $40 billion training and development industry.

The 1998 Harvard Business Review article on emotional intelligence is their most popular piece of all

time. Subsequent articles in HBR focused on:

Emotionally intelligent teams.

Emotionally intelligent organizations.

Leaders who drive organization performance through EQ.

TalentSmart® studies show the link between EQ and job performance:

EQ alone explains 58% of a leader’s job performance.

90% of top performers are high in EQ.

Just 20% of low performers are high in EQ.

EQ is linked to job performance for employees at all levels, in virtually every industry.

Your emotional intelligence is a product of Personal Competence and Social competence. These

qualities divide into four unique skills:

Personal Competence is the collective power of your self-awareness and self-management skills. It's

how you use emotional intelligence in situations that are more about you personally.

Self-Awareness. Can I accurately identify my own emotions and tendencies as they happen?


Self-Management: Can I manage my emotions and behavior to a positive outcome?

Social Competence is the combination of your social awareness and relationship management skills.

It's more about how you are with other people.

Social Awareness: Can I accurately identify your emotions and tendencies as I interact with

you?

Relationship Management: Can I manage the interaction I have with others constructively

and to a positive outcome?

EMOTIONAL INTELLIGENCE: WHAT IS IT?

Many of the skeptics of the EI trend say, “Oh this is nothing new, just academics and

management consultants repackaging old stuff for our consumption.” So, is it something new, or just

common sense, age-old wisdom, personality theory, and communication skills repackaged as the next

training trend? Yes and no is our response. Even though the term emotional intelligence was officially

coined in 1990 by Salovey and Mayer, philosophical and religious texts have been attempting to focus

humanity on the importance of developing awareness and monitoring behavior for centuries. To

clarify, interpersonal skills such as compassion, empathy, and trust, and intrapersonal skills such as

self-knowledge, observation, and contemplation have been reflected on throughout written history. As

an example, the Hindu text Bhagavad-Gita, composed centuries before the Common Era, makes a

good argument for the awareness and management of emotional reactions by stating, “That man is

disciplined and happy who can prevail over the turmoil that springs from desire and anger, here on

earth …” With the expansion of the field of psychology in the early twentieth century, emotional

responses and behavior began to be theoretically and empirically explored. The point to be made here

is that the value and importance to human relations of what we are now naming EI competencies or

skills is not new. Therefore, working on developing emotional intelligence can bring up feelings of

déjà vu in people related to their experiences with similar topics.

However, what is new and promising about the work being done with EI is that now these

competencies are being viewed as skills to be developed rather than personality traits that are

considered less malleable. Current consultants and academics are drawing from psychological studies

throughout the years that in hindsight appear to be aspects of EI. This growing focus on research

investigating psychological and emotional skills adds support to the value of EI in worksettings. For

example, Rosenthal found that people who could better identify the emotions of others were also more

successful at work and in social settings. Bachman’s study on leadership in the US Navy found

warmth, emotional expression, and sociability to be key factors of effectiveness. A study of retail chain

managers revealed that the ability to handle stress predicted net profits and sales per square foot and

per employee

OBJECTIVES OF STUDY

Primary objectives:

To study and determine the emotional Intelligence between different level of employees in an

organization.

Secondary objectives:

To analyses the employees’ feelings towards the management regarding their needs.

To identify and find out the moderating effect of EI on politic perception and commitment.

Limitation:

The data was collected though questionnaire, the responds from the respondents may not be

accurate.

The result drown may not be accurate.

One cannot be sure whether the responses received from the employees are fully reflective

of their real and complete opinion.


RESEACH METHODOLOGY

RESEARCH:

According to Redman & Mory, research is defined as a systematized effort to gain new

knowledge. In general research can be termed as an inquiry into the nature of reasons for and the

consequences of any particular set of circumstances. It’s the process of finding solutions for the

problem after a though analysis of the situational factors.

RESEACH DESIGN:

The present study falls under the category of descriptive studies as the nature of the problem is

to determine the relationship among the different variables the major strength of the survey of survey

research has its wide scope and ability to collect the detailed information from a sample of large

population.

RESEARCH METHODOLOGY:

The research is an attempt to study a problem or situation at any given circumstance and

identify various causes or consequences of that particular problem. It rises to solve a complex and

complicated problem though use of various tools and techniques. These tools and techniques try to

bring out a logical, accurate and scientific solution to a given problem.

Methodology as the name suggests is the method though which the problem or situation is

handled. It involves lot of factors like research design, sample size, segment and techniques of

sampling, tools used etc. all these steps and factors put together to bring out a clear and accurate result.

DESCRIPTIVE RESEARCH:

Descriptive research includes surveys and fact finding enquiries of different kinds. The major

purpose of descriptive research is description of state of affaires as it exists at present. The main

characteristic of this method is that the researcher has no control over the variables. Research can only

report what has happened or what is happening.

A descriptive study is undertaken in order to ascertain and be able to describe the

characteristics of the variable of interest in the situation. Descriptive study is also undertaken to

understand the characteristics of organization that follow certain common practices.

SAMPLE:

A sample is a subset of the population. Samples are collected and statistics are calculated from

the samples so that one can make inference or extrapolations from the sample to the population.

SAMPLE TECHNIQUES:

Simple random sampling techniques adopted in this study.

RESEARCH TOOLS:

Structured questionnaire is considered as a research tool for this study. A structured

questionnaire is a formal list of question framed so as to get the facts. It’s a scheduled containing

various items on which information is sought from respondents.

DATA COLLECTION:

The word datumis a Latin word, which literally means ‘something given’. It means a piece of

information, which can be either quantitative to quantitative. The term ‘data’ means facts and statistics

collected together for references or analysis, thus any information collected data. There are two types

of data that are collected and analyzed in statistics. They are secondary data and primary data.

SECONDARY DATA:

The present study is focusing on to know the effectiveness of communication level in Larsen &

Toubro Leyland. So that, researcher has collected relevant data from the company data base,

Textbooks, library, Internet and Journals.

PRIMARY DATA:

In statistical study primary data is the first hand information or any happening or event. The

two main methods by which primary data are collected are observation and communication. Primary

data are collected by structural questionnaire from the employees those who are working in Larsen &

Touro.


DATA COLLECTION METHOD:

The personal interview method was adopted by the researcher to collect the data by using a

structured questionnaire. The questionnaire consists of 25 questions.

SAMPLE SIZE AND ELEMENT:

Sample of 50 respondents ware obtained from the population.

Sample element is employees of Ramco Cements Ltd.

STATISTICAL TOOLS:

CHI – SQUARE TEST:

The chi –square test a fairly, simple and definitely the popular of all the other tools, the chi –

square test is most widely used non-parametric tests in statistical work. It makes no assumption about

being sampled. The quantity chi-square describes the magnitude of discrepancy between theory and

observation. The uses of chi-square are to test independence of attributes, to test homogeneity and to

test goodness of fit.

Chi-square test is a test for testing the significance of discrepancy between experimental values and the

theoretical values obtained under some theory.

(Oi-Ei)

X2 = ___________

Ei

Where,

O = observed frequency

E = Expected frequency

If calculated value is greater than Tabulated value, we reject the null hypothesis.

If calculated value is less then Tabulated value, we accept the null hypothesis.

PERCENTAGE ANALYSIS

Percentage analysis shows the entire population in terms of percentages. It reveals the number

of belonging is a particular category or the number of people preferring a particular thing, etc., in terms

of percentage. In this study, the number of people who responded in a particulars manner is interpreted

in the form of percentage.

In this research percentage are identified on the analysis and they are presented pictorially by

one way pf diagram in order to have a better quality.

No. of each respondent

Percentage = ___________________ x 100

Total no. of respondents

KARL PEARSON’S CORRELATION COEFFICENT

o The quantity r, called the linear correlation coefficient, measures the strength and the

direction of a linear relationship between two variables.

o The linear correlation coefficient is sometimes referred to as the Pearson product

moment correlation coefficient in honor of its developer Karl Pearson.

o The mathematical formula for computing r is.

n∑xy – ( ∑x ) ( ∑y )

r = _____________________________________

√n ( ∑x2 ) – ( ∑x )2 √n ( ∑y2 ) – ( ∑y )2

o The value of r is such that -1<or= r <or=+1. The + and – sings are used for positive

linear correlation and negative linear correlations, respectively.

o Positive correlation: if x and y have a strong positive linear correlation, r is close to +1

(r=1).


o Negative correlation: if x and y have a strong negative linear correlation, r is close to -1

(r=1).

o No correlation: if there is no linear correlation or a weak linear correlation, r is close to

0(r=0).

o A perfect correlation of +or-1 occurs only when the data points all lie exactly on a

straight line.

DATA ANALYSIS AND INTERPRETATION

Table 1 : AGE

The following table represents age wise classification of the respondents in Ramco Cements

Ltd.

S.NO AGE NO.OF

RESPONDENTS PERCENTAGE %

1 20-30 29 58

2 30-40 13 26

3 40 & above 8 16

Total 50 100

INTERPRETATION:

From the Graph we can interpret that 58 % of the respondents are between the age group of 20-

30 yrs, 26% of the respondents are between the age group of 30-40 yrs and 16 % of the respondents

are 40 & above years.

Table 2: CATEGORY

The following table represents job category wise classification of the respondents in Ramco

Cements Ltd.

S.NO CATEGORY NO.OF

RESPONDENTS PERCENTAGE %

1 Officer 7 14

2 Staff 22 44

3 Workmen 21 42

Total 50 100

INTERPRETATION :

The above represents the classification on the basis of job category. 44% of the respondents

comes under the category, staff, 42% of the respondents comes under the category, workmen, 14% of

the respondents comes under the category, Officer.

Table 3: COMPANIES FULFILLS THE NEED FOR WORK BREAKS

S. NO PARTICULAR NUMBER OF

RESPONDENTS PERCENTAGE

1 Strongly Disagree 0 0

2 Disagree 0 0

3 Natural 5 10

4 Agree 24 48

5 Strongly Agree 21 42

Total 50 100


INTERPRETATION :

The table & the chart show that 48% of the respondents agreed to the statement that, the

company fulfills the need for work breaks effectively for the employees.

Table 4: company’s drinking water & rest rooms provision are upto the mark




2 Disagree 0 0

3 Natural 6 12

4 Agree 21 42


Total 50 100

INTERPRETATION :

The table & the chart shows that 46% of the respondents strongly agreed to the statement that,

the company’s provision for drinking water facility & the rest rooms are upto the mark.

Table 5: Company’s Housing facility is excellent & sufficient.




2 Disagree 0 0

3 Natural 5 10

4 Agree 13 26


Total 50 100

INTERPRETATION :

The above table & the chart depicts that 64% of the respondents strongly agreed to the

statement that, the company’s housing facility excellent & sufficient.

Table 6: Company provides good physical working condition.

S.NO PARTICULAR NO.OF


1 Strongly disagree 1 2

2 Disagree 2 4

3 Natural 6 12

4 Agree 20 40

5 Strongly agree 21 42

TOTAL 50 100

INTERPRETATION :

The above table & the chart show that 42% of the respondents strongly agreed to the statement that,

the company provides good physical working condition for the employees.


Table 7: I have good relations with my immediate supervisor.




2 Disagree 0 0

3 Natural 6 12

4 Agree 19 38


Total 50 100

INTERPRETATION :

The above table & the chart shows that 48% of the respondents strongly agreed to the statement

that, they good relationship with their immediate supervisors

Table 8: There exists a spirit of cooperation in the organization.




2 Disagree 0 0

3 Natural 6 12

4 Agree 21 42


Total 50 100

INTERPRETATION :

The above table shows that 44% of the respondents agreed to the statement that, there is a spirit

of cooperation in their company.

Table 9: The company encourage the establishment of enjoyable relations.




2 Disagree 0 0

3 Natural 7 14

4 Agree 23 46


Total 50 100

INTERPRETATION :

The above table & the chart show that 46% of the respondents agreed to the statement that,

their company encourage the establishment of enjoyable relationship within the workplace.


Table 10: The relationship with my co-workers are good & excellent




2 Disagree 0 0

3 Natural 6 12

4 Agree 19 38


Total 50 100

INTERPRETATION :


that, their relationship with their co-workers are good & excellent.

Table 11: Employees in this organization are treated well and respected.




2 Disagree 0 0

3 Natural 9 18

4 Agree 21 42


Total 50 100

INTERPRETATION : The above table & the chart shows that 42% of the respondents agreed to the statement that,

The employees in this organization are treated well and respectfully.

Table 12: Company’s reward systems are outstanding one.




2 Disagree 2 4

3 Natural 10 20

4 Agree 24 48


Total 50 100

INTERPRETATION :

The above table & the chart shows that 48% of the respondents agreed to the statement that,

The Company’s rewarding system for its employees are of outstanding one.


Table 13: The Company provides the minimum level of supervision.




2 Disagree 4 8

3 Natural 9 18

4 Agree 17 34


Total 50 100

INTERPRETATION :


The company provides the minimum level of supervision.

Table 14: The Company allows and encourages you to your talents & potential outside the

organization.




2 Disagree 1 2

3 Natural 12 24

4 Agree 21 42


Total 50 100

INTERPRETATION :


“The company encourage its employees to express their talents outside the organization”.

Table 15: The Company respects& accepts our beliefs & values in accordance to company’s

values and beliefs.




2 Disagree 2 4

3 Natural 7 14

4 Agree 20 40


Total 50 100

INTERPRETATION :


that, “The company respects& accepts our beliefs & values in accordance to company’s values and

beliefs”.


Table 16: COMPLETE NEED FULFILLMENT LEVEL – MASLOW HIERARCHY OF

NEEDS.

S.NO PARTICULAR PERCENTAGE OF NEED FULFILLMENT

1 Officer 86.4%

2 Staff 84.4%

3 Workman 85.2%

INTERPRETATION :

The above tabulation & the chart is the combination of agreed & strongly agreed respondents

which shows the various levels & percentages of fulfillment of employee Need in Ramco cements Ltd,

Ariyalur.

CHI – SQUARIRE TEST – CALCULATIONS

Table 17 : Table showing a relationship between the different category of job designation of

employees & their opinion about the emotional feelings in their job

Observed Frequency :

Emotional

Feelings

Category of job Designation Grand Total

Officer Staff Workmen

Anger 0 0 0 0

Fear 4 4 2 10

Happiness 3 9 3 15

Sadness 0 9 16 25

Grand Total 7 22 21 50

Null Hypothesis (Ho) :

There is no relationship between the different category of job designation of employees & their

opinion about the emotional feeling in their job

Alternative Hypothesis (H1) :

There exist a relationship between the different category of job designation of employees &

their opinion about the emotional feeling in their job

Oi Ei Oi-Ei (Oi-Ei)2 (Oi-Ei)2/Ei

0

0

0

0

0

0

1

5

0

9

3

6

19

5

2

0

0

0

0

0

0

3.48

1.56

0.96

10.44

4.68

2.88

15.08

6.76

4.16

0

0

0

0

0

0

-2.48

3.44

-0.96

-1.44

-1.68

3.12

3.92

-1.76

-2.16

0

0

0

0

0

0

6.15

11.83

0.96

2.07

2.82

9.73

15.37

3.10

4.67

0

0

0

0

0

0

1.77

7.58

0.96

0.2

0.6

3.38

1.02

0.46

1.12

Total = 17.09


CALCULATION :

Computation of value of test statistics

∑ ( Oi-Ei )2

X2 = ________

Ei

Where,

Oi = Observed Value

Ei = Expected Value

Row total x Column total

Ei = ________________________

Grand Total

Level of significance = 5%

Tabulated value:

Degree of freedom = ( r-1 ) x ( c-1 )

Where, r= number of rows, c= number of columns

Level of significance, α = 5% = 0.05

X2 Tabulated value is 15.5

Calculated value : 15.75

Calculated values is greater than tabulated value

Inference:

Accept null hypothesis, if the x2 calculated value is less than the tabulated value, otherwise reject null

hypothesis.

Hence, we reject the null hypothesis, & accept the alternate hypothesis.

Therefore, we conclude that, there is exist a relationship between the different category of job

designation of employees & their opinion about the emotional feeling in their job

Table 17 Table showing that there is significant different between the emotional feelings of the

employee and their Speech tone.

Observed Frequency :

Job security

opinion Category of job Designation

Grand Total Slow Speech High Speech Tense Tone

Anger 2 0 1 3

Fear 3 3 5 11

Happiness 14 4 5 23

Sadness 11 1 1 13

Grand Total 30 8 12 50

Null Hypothesis (Ho) :

There is no significant different between the emotional feelings of the employee and their

Speech tone.

Alternative Hypothesis (H1) :

There is a significant different between the emotional feelings of the employee and their

Speech tone.


Oi Ei Oi-Ei (Oi-Ei)2 (Oi-Ei)2/Ei

0

0

0

2

0

1

3

3

5

14

4

5

11

1

1

0

0

0

1.8

0.48

0.72

6.6

1.76

2.64

13.8

3.68

5.52

7.8

2.08

3.12

0

0

0

0.2

-0.48

0.28

-3.6

1.24

2.36

0.2

0.32

-0.52

3.2

-1.08

-2.12

0

0

0

0.04

0.23

0.08

12.96

1.54

5.57

0.04

0.10

0.27

10.24

1.17

4.49

0

0

0

0.02

0.48

0.11

1.98

0.88

2.11

0.003

0.03

0.05

1.31

0.56

1.44

Total = 8.953

CALCULATION :

Computation of value of test statistics

∑ ( Oi-Ei )2

X2 = ________

Ei

Where,

Oi = Observed Value

Ei = Expected Value

Row total x Column total

Ei = ________________________

Grand Total

Level of significance = 5%

Tabulated value:

Degree of freedom = ( r-1 ) x ( c-1 )

Where, r= number of rows, c= number of columns

Level of significance, α = 5% = 0.05

X2 Tabulated value is 15.5

Calculated value : 8.953

Calculated values is lesser than tabulated value

Inference :

Accept null hypothesis, if the x2 calculated value is less than the tabulated value, otherwise reject null

hypothesis.

Hence, we accept the null hypothesis, & reject the alternate hypothesis.

Therefore, we conclude that, there is significant different between the emotional feelings of the

employee and their Speech tone. This proves that the emotional feelings will improve the changes in

their activities as well as in the job.


KARL PEARSON’S CORRELATION COEFFICIENT – CALCULATION AIM:

To measure the strength and the relationship between two variables X & Y,

Where,

X – Emotional activities

Y – Level of Employees

PROCEDURE:

The quantity r, called the correlation coefficient, measures the strength and the direction of a

linear relationship between two variables.

The mathematical formula for computing r is:

n∑xy – ( ∑x ) ( ∑y )

r = _____________________________________

√n ( ∑x2 ) – ( ∑x )2 √n ( ∑y2 ) – ( ∑y )2

X Y X2 Y2 XY

0

0.8

12.8

40

46.4

1.2

2.4

12

45.2

39.2

0

0.64

163.84

1600

2152.96

1.44

5.76

144

2043.04

1536.64

0

1.92

153.6

1808

1818.88

100 100 3917.44 3306.56 3782.4

Hence, we have,

∑X=100, ∑Y=100,

∑X2=3917.44, ∑Y2=3306.56 , ∑XY=3782.4.

Apply these values in the following formula

n∑xy – ( ∑x ) ( ∑y )

r = _____________________________________

√n ( ∑x2 ) – ( ∑x )2 √n ( ∑y2 ) – ( ∑y )2

Therefore,

5(3782.44) – (100) (100)

r = _________________________________________

√5(3917.44) –(100)2 x √5(3306.56) – (100)2

(18912.2 – 10,000)

r = ______________________

(97.91) x (93.03)

8912.2

r = __________

9108.7

r = 0.9784

INFERENCE :

Since the correlation coefficient value, r falls between (0.7<r<1), the two variables are said to

be “highly positively correlation variables”.

Therefore, there exist a strong inter – relationship between the emotional activities (x) & the

level of employees (y).


FINDINGS:

58% of the respondents are between the age group of 20-30 yrs, 26% of the respondents are

between the age group of 30-40 yrs and 16% of the respondents are above 40 yrs

44% of the respondents comes under the category of Staff, 42% of the respondents comes

under the category of Workmen and 14% of the respondents are under the category of Officers

48% of respondents agreed to the statement that, the company fulfills the need for work breaks

effectively for the employees.

46% of respondents strongly agreed to the statement that, the company’s provision for drinking

water facility and the rest room are upto the mark

64% of respondents strongly agreed to the statement that, the company’s facility is excellent

and sufficient

42% of respondents strongly agreed to the statement that, the company provides good physical

working condition for the employees

48% of respondents strongly agreed to the statement that, they have good relationship with

their immediate supervisors

46% of respondents strongly agreed to the statement that, there is a spirit of co-operation in

their company

46% of respondents agreed to the statement that, their company encourages the establishment

of enjoyable relationship within the workplace

50% of respondents agreed to the statement that, their relationship with their co-workers are

good and excellent

42% of respondents agreed to the statement that, the employees in the organization are treated

well and respectfully

48% of respondents agreed to the statement that, the companies rewarding system are of

outstanding one.

34% of respondents agreed to the statement that, the companies provides the minimum level of

supervision

42% of respondents agreed to the statement that, the company encourage its employees to

express their talents outside the organization

42% of respondents strongly agreed to the statement that, the company respects and accepts

one beliefs and values in accordance to company’s values and beliefs

The complete need fulfillment levels are obtained as 86.4% of officers, 84.4% of staff and

85.2% of workman. This shows that all the need have been satisfying met in correct proportion

to the employees

SUGGESTION

The opinion of the employees regarding the need based training is good

the organization can take decision according to the employees feeling about their job

the management can take more initiatives in the matter of employees status development and

recognition

the company can advocate more entertainment and cultural programmes to strengthen the

relationship among the co-workers and supervisors

CONCULSION

The study reveals that the company has fulfilled the needs of the employees to satisfactory

level. The organization is much interested in accepting the feelings of the employees.

This study also reveals that the employees’ feelings are also considered by the co-workers as

well as by the organization

The suggestions and recommendations when implemented will still more benefit to the

organization.


BIBLIOGRAPHY

Cooper. R.K & Sawaf. A. Executive EQ: Emotional Intelligence in Leadership and

Organizations, New York: Gosset, Putnam

Goleman.D, Working with Emotional Intelligence, New York: Bantam Books.

Goleman. D Emotional Intelligence: Why it can matter more than IQ? New York: Bantan

Books.

Robbins . S.P (2003) Organizational Behaviour, Printice Hall of India

Nikolaou,I & Tsaousis ,I (2005), Emotional Intelligence in the work place..


Bank Customer Satisfaction for Bancassurance Products in India

Palanisamy Balamani Banudevi,

Associate Professor, School of Management, Professional Group of Institutions,

Tirupur (District), India.

ABSTRACT

Globally there is a trend of increased convergence of financial services rather than getting

confined to the narrow channel of banking products. The line dividing the banking and non-banking

financial products is increasingly getting thinner. A typical illustration of this trend would be well

organized distribution of insurance products through banking networks. The concept is popularly

called as Bancassurance.

Banks look this channel as generating additional income and generally insurance is usually a

long term contract. Therefore commission continues to flow in, till its maturity. Bank is viewed as

trustworthy financial market by customer and if bank don’t offer these products they face a threat of

customer’s migration.

This model requires a synchronized work culture between banks and insurers. In India the

model is gaining its importance like other European countries especially France, Italy and therefore the

researcher is in need to study the bancassurance model.

Keywords: Bancassurance, Satisfaction, India.

BANCASSURANCE –INDIAN SCENARIO

World over the idea of separation of roles between banks and other financial activities became

redundant. After the Glass-Steagall Act, of 1933, in the United States, there was a strict separation of

banking and nonbanking activities. During the post Gramm-Leach-Bliley (GLB) Act, of 1999, it was

stated to have indicated increased preference for banks conterminously dealing with other non-banking

financial products, including the insurance products. In Asian countries (e.g., Taiwan, Singapore,

Japan, etc.) also, the trend was set towards financial supermarket. The financial liberalization and

financial innovations drew the worlds of banking and insurance closer together, de-segmenting the

financial industry and spurring competition. Therefore, banks dealing in insurance products

increasingly became an accepted norm rather than exception.

In India, ever since espousing of financial reforms, following the recommendations of First

Narasimham Committee report in 1991, the contemporary financial landscape was reshaped. Banks, in

particular, paced into several new areas and offered inventive products, viz., merchant banking, lease

and term finance, capital/ equity market related activities, hire purchase, real estate finance and so on.

Thus, present-day banks became far more diversified than ever before. Therefore, their entry into

insurance business was only a natural upshot and was fully justified too. Hence, ‘insurance’ became a

different financial product, vital by the bank customers.

The Reserve Bank of India, being the regulatory authority of the banking system recognized

the need for banks to diversify their activities at the right time and allowed them to enter into insurance

sector as well. Furtherance to this line, it issued a set of detailed guidelines for the banks in India, to

enter into insurance sector. The scope for Bancassurance in the Indian context from banker’s and

insurer’s perspectives dwells on different Bancassurance models and the present trend of

Bancassurance models in India. It highlights some issues not only in general, but they are regulatory

and supervisory interconnected too. It was obvious that reforms in financial sector would not be

complete if one of the key sub-sectors, viz., and insurance sector was not being taken along. Therefore,

the Government of India appointed a Committee on Reforms in the Insurance Sector under the

Chairmanship of Late R.N.Malhotra (known as Malhotra Committee) in 1993, and the committee

submitted its report in 1994.

In the insurance sector, following the recommendations of Malhotra Committee report, the

Insurance Regulatory and Development Authority (IRDA), was incorporated as a statutory body in


April-2000, IRDA acted as an exclusive Regulatory Authority for the insurance sector through the

enactment of IRDA Act, 1999. Given India’s size as a continent, it has, however, a very low insurance

penetration and low insurance density. As opposed to this, India had a well-entrenched wide branch

network of banking system which only few countries in the world could match with. An era of

competition was put in with availability of wide range of insurance products, in the market than after.

Bancassurance simply means selling of insurance products by banks. Bancassurance term first

appeared in France in 1980, to define the sale of insurance products through banks’ distribution

channels (SCOR 2003). In this arrangement, Insurance companies and banks undergo a tie-up, thereby

allowing banks to sell the insurance products to its customers. This is a system in which a bank has a

corporate agency with one insurance company to sell its products. By selling insurance policies bank

earns a revenue stream apart from their conventional services. It is called as fee based income. This

income is purely risk free for the bank since the bank simply plays the role of an intermediary for

sourcing business to the insurance company.

Bancassurance is a long standing dream of offering a seamless service of banking and life /

non-life products. India, being the one of the most populous country in the world with a huge potential

for insurance companies, has an envious chain of bank branches as the lifeline of its financial system.

Banks with over 65,000 branches & 65% of household investments are the backbone of the Indian

financial market. In India, there are 75 branches per million inhabitants. Clearly, that’s something

insurance companies - both private and state owned would find nearly impossible to achieve on their

own. Considering bank as a channel for insurance gives insurance an unlimited exposure to Indian

consumers.

Banks have expertise on the financial needs, saving patterns and life stages of the customers

they serve. Banks also have much lower distribution costs than insurance companies and thus are the

fastest emerging distribution channel. For insurers, tying up with banks provides extensive

geographical spread and countrywide customer access; it is the logical route for insurers to take.

Coimbatore is the second largest city (by population) in the South Indian state of Tamil Nadu

and a major textile and engineering hub of South India1. It is a heavily industrialized city and a

regional hub for textiles, manufacturing, software services, education and health care. The city is also

referred to as “the Manchester of South India” due to the presence of a flourishing textile industry. The

city has over 25,000 small, medium and large scale industries and two IT SEZ’s. Coimbatore has a

well developed educational infrastructure, with 7 Universities, 2 medical colleges and over 54

Engineering Colleges and 70 Arts and Science colleges. Thus, it is important that we study the

effectiveness of Bancassurance business model with reference to bank customers in Coimbatore. The

researcher has undertaken to study the Bancassurance phenomenon.

In India liberalization started in the year 1990 and in the insurance sector in particular it started

in 1999 with the setting up of the regulator in this field, namely Insurance Regulatory and

Development authority (IRDA)2. Banks were permitted to undertake insurance business from the year

2000-20013. As it offered a very attractive preposition to banks for generating additional fee based

income against the backdrop of thinning spreads and severe competition, a series of tie-ups were

announced immediately after the approval by IRDA and are even continuing to date. Even many co-

operative banks have announced tie-ups with insurance companies to distribute insurance products.

For the insurance companies too, it was a winning proposition as they could now leverage the wide

network of the banks immediately: the process of on its own would have taken several years. An added

attraction was that banks in India have enjoyed the trust and confidence of the customers, even though

they have not been very pleased with the service quality levels. Bancassurance as a business generating

channel has been increasingly becoming important for the new private insurance companies, especially

for the new private insurance companies started after the reforms in the industry. The industry players

analyzed the various models in operation across the world, which provide them with a wide variety of

options and went for a model that seemed appropriate to them. While it is early to comment on the

1 http://en.wikipedia.org/wiki/Coimbatore

2 http://www.irda.gov.in

3 Entry of Banks into Insurance Business, RBI, DBOD.No.FSC/BC.16/24.01.018/99-2000


models the banks and insurance companies have decided to settle for, these players are increasingly

going in for the Corporate Agency Model. This model is attractive for the banks as it offers handsome

returns (up to 35% in the first year of new business ) involves very low startup costs (investment in

the time and licensing of employees) and business risk is underwritten entirely by the insurance

companies. Insurance products wrapped around the bank’s loan and deposit products have also been

gaining in popularity due to their mass appeal and simple product design while the referral model tie-

ups have not been that successful.

Bancassurance, in its early stages in India, has brought about a host of cultural, HR and

Operational challenges along with it. The success of the players concerned would depend on how they

are able to cope up. For the banks it is the challenge of making their employees cover new ground by

first undergoing mandatory hours of training, clearing a written test, getting themselves licensed and

selling a new stream of products aggressively, in addition to their regular banking products. From the

insurance companies, it is the challenge of facilitating this fledgling distribution channel to the fullest

possible extent by designing appropriate products, a very conducive operational environment

especially for the medical and financial underwriting process and designing effective training

programs. Banks also have the vital task of managing long-term insurance contracts by servicing it

continuously till its logical conclusion thus resulting in a perennial revenue stream. Also, it needs

better customized services by individual agents, to make an impact as a superior alternative channel of

distribution. Banks are well-positioned to take advantage of the improvements in technology to

improve their service quality. Internet and ATM channels can be very effective facilitators in

managing the insurance contracts.

GROWTH OF BANCASSURANCE IN INDIA

From a nameless channel, when the insurance sector opened up in India about ten years ago,

Bancassurance had secured its spot as a key distribution platform, and had started widely attracting the

attention of banks, insurers, regulators and policy planners. In India, known for its large multiplicity of

banks and widespread branch networks, over the last few years, these branches are increasingly

utilized to dish-up the insurance needs of over 400 million bank customers.

Chart 1: Distribution Channels in Insurance. (Source: Tower Watson Survey 2009-10)

Objective:

The objective of this study is to examine the satisfaction level of bank customers for the

insurance product offered by the bank. The present study was conducted among the one public sector

bank SBI and one private sector ICICI bank customers (respondents) are from India. The data

collected and analyzed using suitable statistical tool. The Primary data were collected by using

structured questionnaire. The sample is 300 rounded figures after considering the product holders.

Statistical Tools for Analysis:

The data collected from sample were suitably tabulated and used in the appropriate place for

interpretation. Reports, journals, articles and books were also referred to collect secondary data. The

primary data collected were analyzed by using the following statistical tools.


36%

55%

3%2%

4%

Highly satisfied

Satisfied

Neutral

Dissatisfied

Highly dissatisfied

Descriptive analysis:

The descriptive analysis was used to express the percentage respondents falling under each

category. It describes the total frequency of respondents/responses in percentage.

Average Score Analysis:

Based on the consolidated opinion obtained from five point scaling technique for different

categories of respondents, the weighted average score was calculated to assess the level of

satisfaction/agreeability of the respondents.

ANOVA

The ANalysis Of VAriance is a powerful and common statistical procedure in the social

sciences. The ANOVA is used to test the significant difference in the mean values of more than two

groups.

THE DESCRIPTIVE ANALYSIS SHOWS THE LEVEL OF SATISFACTION REGARDING

BANCASSURANCE PRODUCTS.

Chart 2: Exhibits the Level of Satisfaction with General Banking Services

Majority 55% of the

respondents were satisfied with the

general banking services offered by

their bank. Overall 91% of the

respondents were satisfied with

current banking services, which

denote that banking sector has

enhanced its services and customer

relationship management in recent

years. This good will is quite enough

to penetrate the Bancassurance

market.

The level of satisfaction

regarding Bancassurance products

with factors the variables like product

features, assistance provided to choose

better plan, administration charges, Process timing, CRM, Loan facilities, Rider(Add-on)

features, NAV prices, Underwriting, Coverage years (age-at-entry, age-exit), Premium rate,

Policy terms, Premium receipts, Late fee charges it was found that among these factors 60.28%

of the respondents were highly satisfied with the assistance provided to choose better plan in

the Bancassurance products.

Majority 73% of the respondents felt that Bancassurance products may affect the regular

banking services. This opinion is due to their low level of awareness of Bancassurance and its

operational isolation from regular banking activities. The influence of Bancassurance to

customer may affect the level of customer satisfaction. Hence, it is suggested to promote the

product with proper level of education.

Majority 67.67% of the respondents were visiting the bank thrice a week.

AVERAGE SCORE ANALYSIS SHOWS THE SATISFACTION LEVEL OF BANCASSURANCE

WITH PERSONAL FACTORS.

The male gender level of satisfaction for Bancassurance product feedback was few than female

genders satisfaction level factors that was due to the fact that the savings attitude and budget

planning of female respondents have improved considerably than previous years. Moreover

though the female respondents were less in number in our study their entry level in banks for

new services is growing at a rapid speed.


The average score on the level of satisfaction by Bancassurance products feedback of above 50

years age group had significance for their transaction. Thus the aged respondents have used the

possible Bancassurance products to attain the maximum benefits from their existing bank

transaction for a secured banking transaction.

Only married respondents had purchased the Bancassurance products and they were satisfied

with assistance provided to choose better plan, product features and premium rate. Respondents

were neutrally satisfied late fee charges, premium receipts, policy terms, policy coverage years,

underwriting, and NAV price of Bancassurance product.

Satisfaction level of occupants in business has agreed to the Bancassurance model and their

feedback has acquired in most of the product features. The study revealed that the majority

respondents were male who were under graduates. The study results that the respondent’s age

group of 23-30years may reveal the business respondents of the study, Therefore business

occupants who were experienced in the regular banking transaction support the Bancassurance

product.

The family monthly income of respondent’s satisfaction level of Bancassurance products is

favorable in turn with their income.

ANOVA ANALYSIS

(A) The following table shows the analysis of variance between the duration of being bank

customer and their level of satisfaction of Bancassurance products.

Hypothesis: The duration of being bank customers have no significant difference on

satisfaction of Bancassurance products.

ANOVA – DURATION OF BEING BANK CUSTOMER Vs LEVEL OF SATISFACTION

The descriptive table express that 5 years – 10 years account holders have found high mean

value of 43.02. The F-value is 1.489 and sig. (p-value) is 0.220, which is greater than the level of

significance 0.05.

Findings:

The duration of being bank customers have no significant difference of Bancassurance product

satisfaction. Therefore, the customer satisfaction was found close to one another.

(B) The following table shows the analysis of variance between the frequency of visit to

bank and their level of satisfaction of Bancassurance products.

Hypothesis: The frequency of visit to bank has no significant difference on satisfaction of

Bancassurance products.

ANOVA

Level of Satisf act ion

129.329 3 43.110 1.489 .220

3967.111 137 28.957

4096.440 140

Between Groups

Within Groups

Total

Sum of

Squares df Mean Square F Sig.


ANOVA – FREQUENCY OF VISIT TO BANK Vs LEVEL OF SATISFACTION

According to descriptive analysis, fortnight visiting customer found high level of satisfaction

43.67 and the mean level of satisfaction among various frequency of visit category is 41.87. From the

ANOVA table, it can be observed that F-value is 1.213 and sig. (p-value) is 0.306, which is greater

than the level of significance 0.05. Hence, the hypothesis is rejected.

FINDINGS:

The frequency of visit to bank has no significant difference of satisfaction on Bancassurance

products.

CONCLUSION

To conclude Bancassurance in India is conceptually in its emerging stage but holds a good

promise for the future. Banks have been attracted to this field in view of scope for generating non-

interest income while for the insurers it is of increasing the low insurance penetration levels in the

country by leveraging the extensive distribution reach of Indian banks.

India a land of promise for Bancassurance with the democratic government and a population of

121 crores and has a savings rate of 23% of which savings with bank constitutes more than 50% of the

domestic households savings. This paper on the satisfaction of customers for bancassurance products

presents a vista of opportunities for private and public insurers to take advantage of our extensive bank

networks.

Reference: Websites, Books and Journals:

a. Source: Tower Watson Survey 2009-10

b. 1http://en.wikipedia.org/wiki/Coimbatore

c. 2http://www.irda.gov.in

d. 3Entry of Banks into Insurance Business, RBI, DBOD.No. FSC/BC.16/24.01.018/99-

2000.

e. www.icfai.org

f. www.knowledgedigest.com

g. www.einsuranceprofessional.com

h. www.googlesearch.com

i. The journal of insurance institute of India, vol .no .xxx, July-December, 2004.

j. Insurance Chronicle, July 2005.

k. Report of IBA.

l. Bancassurance - Trends and Opportunities, edited by V.V.Ravikumar.

Descriptives


16 39.6875 5.25000 1.31250 36.8900 42.4850 30.00 50.00

90 41.7889 5.33905 .56279 40.6706 42.9071 32.00 52.00

10 41.2000 5.28730 1.67199 37.4177 44.9823 32.00 51.00

11 44.0909 6.23626 1.88030 39.9013 48.2805 29.00 50.00

3 43.6667 6.80686 3.92994 26.7575 60.5758 36.00 49.00

11 43.5455 4.86546 1.46699 40.2768 46.8141 35.00 53.00

141 41.8652 5.40928 .45554 40.9646 42.7659 29.00 53.00

Daily

Weekly Thrice

Weekly Twice

Weekly Once

Fortnight

Montly Once

Total

N Mean Std. Dev iation Std. Error Lower Bound Upper Bound

95% Conf idence Interval for

Mean

Minimum Maximum

ANOVA


176.110 5 35.222 1.213 .306

3920.329 135 29.039

4096.440 140

Between Groups

Within Groups

Total

Sum of

Squares df Mean Square F Sig.

http://en.wikipedia.org/wiki/Coimbatore

http://www.irda.gov.in/

http://www.icfai.org/

http://www.knowledgedigest.com/

http://www.einsuranceprofessional.com/

http://www.googlesearch.com/


Strategies to Enter New Markets – Mergers & Acquisition

and Technological advances

Ms. Ruchi Tripathi, Assistant Professor (M.B.A.Dept.), &

Mr. Sharad Tripathi, Assistant Professor (M.B.A.Dept.),

Kanpur Institute of Technology, Kanpur

A-1, UPSIDC Industrial Area, Rooma, Kanpur-208001

ABSTRACT

Mergers, acquisitions and technological advances are the upcoming and most lucrative gateways to

enter into new markets. Business-level strategy, which frequently includes Mergers and Acquisitions

and technological advances, in due course desires to maximize their corporate profits and

innovativeness in form of innovative ideas and having an innovative culture. Business combinations

which take forms of merger, acquisitions, and technological advances are important features of

corporate structural changes; they have played an important role in financial, economic and all round

growth of a firm.

The manifestation of buyouts and mergers is more intense during last few years due to increased

competition among companies in their effort to expand their market share, to differentiate their

business and to enter new markets. Technology has a profound impact on business research. The paper

also lays emphasis on the impact of these strategies on the organization as well as on to the Indian

Industry.

Keywords: Mergers, Acquisitions, Technology advances, Strategies.

INTRODUCTION:

Mergers and acquisitions along with a combination of advanced technology are the most frequently

used methods of growth for companies in the twenty first century in order to enter into new markets

and acquire a good market share.. Mergers and acquisitions present a company with a potentially

larger market share and open it up to a more diversified market. At times, a merger or an acquisition

simply makes a company larger, expands its staff and production, and gives it more financial and other

resources to be a stronger competitor on the market. They present a company with a potentially larger

market share and which is technologically very advanced in relation to it all the activities to be carried

on in an organization. Research has shown that due to increasing advances in technology and other

processes, which make transactions, among other aspects of business, more effective and efficient,

mergers and acquisitions have become more frequent today than ever before.

In the world of growing economy and globalization, major companies on both domestic and

international markets struggle to achieve the optimum market share possible. Every day business

people from top to lower management work to achieve a common goal – being the best at what you do,

and getting there as fast as possible. As companies work hard to beat their competitors they assume

various tactics to do so. Some of their tactics may include competing in the market of their core

competence, thus, insuring that they have the optimal knowledge and experience to have a fighting

chance against their rivals in the same business; hostile takeovers; or the most popular way to achieve

growth and dominance – mergers and acquisitions.

Globalization has increased the competitive pressure in the markets. In a highly challenging

environment a strong reason for merger and acquisition is a desire to enter into new markets and to

survive in the market. Thus apart from growth, the survival factor has off late, spurred the merger and

acquisition activity worldwide. Take retail finance for instance. With corporate banking becoming an

unprofitable business for banks due to high risk of asset quality, banks including financial institutions

are tapping the retail finance segment. ICICI's acquisition of Anagram Finance from Lalbhai group,


HDFC Bank's merger with Times Bank and ICICI Bank's merger with Bank of Madura are some of the

latest examples of consolidation in the banking sector.

Mergers and acquisitions are means by which corporations combine with each other. Mergers occur

when two or more corporations become one. To protect shareholders, state law provides procedures for

the merger. A vote of the board of directors and then a vote of the shareholders of both corporations is

usually required. Following a merger, the two corporations cease to exist as separate entities. Mergers

may come as the result of a negotiation between two corporations interested in combining, or when

one or more corporations "target" another for acquisition. The term "acquisition" is typically used

when one company takes control of another. This can occur through a merger or a number of other

methods, such as purchasing the majority of a company's stock or all of its assets. In a purchase of

assets, the transaction is one that must be negotiated with the management of the target company.

Compared to a merger, an acquisition is treated differently for tax purposes. Technological advances

have enabled dramatic change in organizational design and communication as expressed through such

actions as corporate downsizing and increased telecommuting. Technology

fosters these changes

because computers and advanced technology minimize the impact of time and place on organization.

The heightened use of technology and advances has led to formation of a complete organization.

Mergers and Acquitsions are a way to the introduction of technological advancement in the

organizations as it is through mergers and acquitisitions that the new companies bring in their new

technologies and introduce them in the organizations for their overall development.

BACKGROUND OF THE STUDY:

The first buyout- merger outbreak in Greece started in 1998. It was the beginning of an effort made by

Greek companies in order to adapt to the globalized environment in the market of goods, services and

capitals. The leading actors of buyouts- mergers came in their overwhelming majority from companies

already introduced to the Athens Stock Exchange. These companies attempted to support their capital

basis so as to successfully deal with the increasing needs of domestic market and these of the Balkan

countries and from the other side to put up a defense against the competition coming from other

European companies (Lyroudi et.al, 2000).

The last peak, in the final years of the twentieth century, brought very high levels of merger activity.

Bolstered by a strong stock market, businesses merged at an unprecedented rate. The total dollar

volume of mergers increased throughout the 1990s, setting new records each year from 1994 to 1999.

Many of the acquisitions involved huge companies and enormous dollar amounts.

II. LITERATURE REVIEW:

Various studies have been conducted on Mergers and Acquitisitions among them one was in 1993

Berkovitch and Narayanan conducted a study on the gain and concluded that total gains from M&A

are always positive and thus can say that synergy appears. Vin (1996) and Schwert conducted an event

study for a period of fourty days prior merger to 40 days post merger and concluded that Merged firms

were under performing than their industry counterparts. Healy, Palepu and Ruback (1992) studied post

merger performance of 50 largest US merger between 1979-1984 for both operating and investment

characteristic using industry adjusted technique and concluded that as a result of merger Assets

turnover and Return on market value of assets improved but investment in capital goods and R&D

expenditures not improved significantly.

In 1992 agarwal, Jaffe and Mandelkar also studied post merger performance of the companies with a

different perspective. They adjusted data for size effect and beta weighted market return and found that

shareholders of the acquiring firms experienced a wealth loss of about 10% over the period of five

years following the merger completion. According to a study done by Loughran and Vijh (1997) for a


period 1970 to 1989, five year buy and hold return for sample was 88.2% compared to 94.7% for their

matching firms. This has a statistic of 0.96, which was not significant.

Berg, Duncan and Friedman (1982) conducted a comprehensive cross-firm and crossindustry analysis

to measure the effect of joint venture activities on the performance of the companies and found

ambiguous but positive short-term gains and insignificant long-term impact on profitability. They

further noted that even short-term gains were negative for technological or knowledge-oriented

acquisitions and were positive for production and marketing oriented acquisitions, because of

increased market power leading to increased profit margins and efficiency gains. They further found

that while short term gains depend on industry to industry, no industry (Out of 19 industries in their

sample) show long-term significant gain.

Revenscraft and scherer (1986) found that on average Mergers and acquisitions made by over 450 US

companies during 60-70s did not lead to an increase of market shares and profitability but instead they

found declining performance for most companies. They also found that mergers did slightly worse

than their industry peers at the time of acquisition, but results were clearly poorer after about 10 years

from acquisitions. Odagiri and Hase (1989) found a growing number of Japanese firms engaging in

mergers and acquisitions. However they found no evidence that in general profitability or growth

improved significantly.

Porter (1987) attempted to study this relationship in a slightly different way. He took rate of

divestment of new acquisitions by companies within a few years as an indicator of success or failure.

He found that about 75 percent of all unrelated acquisition in the sample was divested after few years

and 60 percent of acquisitions in entirely new industry.

According to the theory of financial turbulences, Grot (1969) developed the merger wave model where

waves occur when an increase in the general financial activity results in an imbalance in the

marketplace of products. Investments who keep a higher positive outlook for future demand from

others, give higher price to the bought out companies. Mergers are the result of the efforts for the

consolidation of these capital gains.

The STEP (Social-Technical-Economic-Political) model joins social, technical, economic and political

proportions and offers an additional framework wherein the merger waves can be interpreted

(Panagopoulou Ekat., 2002).

The technological innovations of the ‘80s in mass production and transportations as well as the

innovations in informatics technology in the ‘90s boosted the merger wave. Changes in the tax system

have also led to a drastic change in the business structure of the economies.

MERGER MOVEMENTS (Refer to table 1)

RESEARCH METHODOLOGY:

The research design employed is the descriptive study. The relationship between the different variables

namely the size of the firm, net sales total assets opening size closing size growth are analyzed in this

research article. In order to construct a partial list of mergers and acquitions in the years 1999-2009,the

study has used the secondary data The target population for this research article is the number of

companies which have been merged, acquired and which have introduced technological advances from

the period of 1990-2009.the sample size of the study are 19. The study involves secondary data.

MAJOR MERGERS AND AQUITISITIONS FROM 1990-2009(Refer to table 2 and 3)

Ten biggest Mergers and Acquisitions deals in India

Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal

which cumulatively amounted to $12.2 billion.


Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of

$11.1 billion on February 11, 2007.

India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis

Inc in February 2007. The total worth of the deal was $6-billion.

Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of

Japanese pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion.

The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal

amounted to $2.8 billion and was considered as one of the biggest takeovers after 96.8% of

London based companies' shareholders acknowledged the buyout proposal.

In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata

Teleservices for USD 2.7 billion.

India's financial industry saw the merging of two prominent banks - HDFC Bank and Centurion

Bank of Punjab. The deal took place in February 2008 for $2.4 billion.

Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal

amounted to $2.3 billion.

2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making it

ninth biggest-ever M&A agreement involving an Indian company.

In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer Repower.

The 10th largest in India, the M&A deal amounted to $1.7 billion.

Top 10 acquisitions made by Indian companies worldwide:

(Refer to table 4)

If we calculate top 10 deals itself account for nearly US $ 21,500 million. This is more than double the

amount involved in US companies’ acquisition of Indian counterparts. Graphical representation of

Indian outbound deals since 2000.

The highlights of indian mergers and acquisitions scenario as it stands (refer to fig 1)

Indian outbound deals, which were valued at US$ 0.7 billion in 2000-01, increased to US$ 4.3 billion

in 2005, and further crossed US$ 15 billion-mark in 2006. In fact, 2006 will be remembered in India’s

corporate history as a year when Indian companies covered a lot of new ground. They went shopping

across the globe and acquired a number of strategically significant companies. This comprised 60 per

cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of

acquisitions were made with cash payments.

INTENTION BEHIND M&A

There are a number of reasons why a corporation will merge with, acquire, or be acquired by another

corporation. Sometimes, corporations can produce goods or services more efficiently if they combine

their efforts and facilities. These efficiency gains may come simply by virtue of the size of the

combined company; it may be cheaper to produce goods on a larger scale. Collaborating or sharing

expertise may achieve gains in efficiency, or a company might have underutilized assets the other

company can better use.

Also, a change in management may make the company more profitable. Other reasons for acquisitions

have to do more with hubris and power. The management of an acquiring company may be motivated

more by the desire to manage ever-larger companies than by any possible gains in efficiency.

The dominant rationale used to explain M&A activity is that acquiring firms seek improved financial

performance. The following motives are considered to improve financial performance:


•Economy of scale

•Economy of scope

•Increased revenue or market share

•Cross-selling

•Synergy

•Taxation

•Geographical or other diversification

•Resource transfer

•Vertical integration

•Diversification

•Manager's hubris

•Empire-building

•Manager's compensation

THE IMPACT OF TECHNOLOGICAL ADVANCES

Technological advances play a vital role in the emergence of a new and successful organization.

Through the upcoming of mergers and acquitisitions they have emerged with improved technology

means soa s to update an organization. When an organization is merged or acquired the technology

that the organization is using also gets merged and acquired. Thus the new entrants in the market with

advanced technology contribute a lot towards the economy.

Most technologies existing today were designed to expedite the way we manage, store, handle,

analyze, and run an organization. Computers are used routinely to capture transaction data. Devices

such as credit card readers, optical scanners, telephone keypads, and computer terminals, collect vast

amounts of data daily. Most processing of organization are electronically transacted. Many

organizations have used technology to fundamentally change the way work is done, using technology

in ways that break traditional rules of doing business.

Clearly, nothing has changed organizations more dramatically than advances in technology.

Technology has helped organizations overcome the limitations previously imposed by differences in

time and place. Computers allow organizations to capture, analyze, and share information from

anywhere in the These new capabilities have fostered significant changes in organizational processes,

decision making, and organizational design. With the help of information technology, organizations

have become "leaner, more responsive to competitive pressures and, unfortunately, less promising as a

source of lifetime employment" (Andrews & Herschel, 1996, p. 2). Thus the technological advances

are also a reason to attract the organizations for mergers and acquitisitions.

INSPIRATION FOR MERGERS AND ACQUISITIONS

There are a number of possible motivations that may result in a merger or acquisition. One of the most

oft cited reasons is to achieve economies of scale.

Economies of scale may be defined as a lowering of the average cost to produce one unit due to an

increase in the total amount of production. The idea is that the larger firm resulting from the merger

can produce more cheaply than the previously separate firms.

Efficiency is the key to achieving economies of scale, through the sharing of resources and technology

and the elimination of needless duplication and waste. Economies of scale sounds good as a rationale

for merger, but there are many examples to show that combining separate entities into a single, more

efficient operation is not easy to accomplish in practice.

A similar idea is economies of vertical integration.


This involves acquiring firms through which the parent firm currently conducts normal business

operations, such as suppliers and distributors. By combining different elements involved in the

production and delivery of the product to the market, acquiring firms gain control over raw materials

and distribution out-lets. This may result in centralized decisions and better communications and

coordination among the various business units. It may also result in competitive advantages over rival

firms that must negotiate with and rely on outside firms for inputs and sales of the product.

A related idea to economies of vertical integration is a merger or acquisition to achieve greater market

presence or market share. The combined, larger entity may have competitive advantages such as the

ability to buy bulk quantities at discounts, the ability to store and inventory needed production inputs,

and the ability to achieve mass distribution through sheer negotiating power. Greater market share also

may result in advantageous pricing, since larger firms are able to compete effectively through volume

sales with thinner profit margins.

This type of merger or acquisition often results in the combining of complementary resources, such as

a firm that is very good at distribution and marketing merging with a very efficient producer. The

shared talents of the combined firm may mean competitive advantages versus other, smaller

competition.

The ideas above refer to reasons for mergers or acquisitions among firms in similar industries. There

are several additional motivations for firms that may not necessarily be in similar lines of business.

One of the often-cited motivations for acquisitions involves excess cash balances. Suppose a firm is in

a mature industry, and has little opportunities for future investment beyond the existing business lines.

If profitable, the firm may acquire large cash balances as managers seek to find outlets for new

investment opportunities. One obvious outlet to acquire other firms.

The ostensible reason for using excess cash to acquire firms in different product markets is

diversification of business risk. Management may claim that by acquiring firms in unrelated businesses

the total risk associated with the firm's operations declines. However, it is not always clear for whom

the primary benefits of such activities accrue. A shareholder in a publicly traded firm who wishes to

diversify business risk can always do so by investing in other companies shares. The investor does not

have to rely on incumbent management to achieve the diversification goal. On the other hand, a less

risky business strategy is likely to result in less uncertainty in future business performance, and

stability makes management look good. The agency problem resulting from incongruent incentives on

the part of management and shareholders is always an issue in public corporations. But, regardless of

the motivation, excess cash is a primary motivation for corporate acquisition activity.

To reverse the perspective, an excess of cash is also one of the main reasons why firms become the

targets of takeover attempts. Large cash balances make for attractive potential assets; indeed, it is often

implied that a firm which very large amount of cash is not being efficiently managed. Obviously, that

conclusion is situation specific, but what is clear is that cash is attractive, and the greater the amount of

cash the greater the potential to attract attention.

Thus, the presence of excess cash balances in either acquiring or target firms is often a primary

motivating influence in subsequent merger or takeover activity.

Another feature that makes firms attractive as potential merger partners is the presence of unused tax

shields. The corporate tax code allows for loss carry-forwards; if a firm loses money in one year, the

loss can be carried forward to offset earned income in subsequent years. A firm that continues to lose

money, however, has no use for the loss carry-forwards. However, if the firm is acquired by another

firm that is profitable, the tax shields from the acquired may be used to shelter income generated by


the acquiring firm. Thus the presence of unused tax shields may enhance the attractiveness of a firm as

a potential acquisition target.

A similar idea is the notion that the combined firm from a merger will have lower absolute financing

costs. Suppose two firms, X and Y, have each issued bonds as a normal part of the financing activities.

If the two firms combine, the cash flows from the activities of X can be used to service the debt of Y,

and vice versa. Therefore, with less default risk the cost of new debt financing for the combined firm

should be lower. It may be argued that there is no net gain to the combined firm; since shareholders

have to guarantee debt service on the combined debt, the savings on the cost of debt financing may be

offset by the increased return demanded by equity holders. Nevertheless, lower financing costs are

often cited as rationale for merger activity.

One rather dubious motivation for merger activity is to artificially boost earnings per share. Consider

two firms, A and B. Firm A has earnings of $1,000, 100 shares outstanding, and thus $10 earnings per

share. With a price-earnings ratio of 20, its shares are worth $200. Firm B also has earnings of $1,000,

100 shares outstanding, but due to poorer growth opportunities its shares trade at 10 times earnings, or

$100. If A acquires B, it will only take one-half share of A for each share of B purchased, so the

combined firm will have 150 total shares outstanding. Combined earnings will be $2,000, so the new

earnings per share of the combined firm are $13.33 per share.

It appears that the merger has enhanced earnings per share, when in fact the result is due to

inconsistency in the rate of increase of earnings and shares outstanding. Such manipulations were

common in the 1960s, but investors have learned to be more wary of mergers instigated mainly to

manipulate per share earnings. It is questionable whether such activity will continue to fool a majority

of investors.

Finally, there is the ever-present hubris hypothesis concerning corporate takeover activity. The main

idea is that the target firm is being run inefficiently, and the management of acquiring firm should

certainly be able to do a better job of utilizing the target's assets and strategic business opportunities. In

addition, there is additional prestige in managing a larger firm, which may include additional

perquisites such as club memberships or access to amenities such as corporate jets or travel to distant

business locales. These factors cannot be ignored in detailing the set of factors motivating merger and

acquisition activity.

EXISTING TRENDS IN MERGERS AND ACQUISITIONS

Mergers and Acquisitions were at an all-time high from the late 1990s to 2000. They have slowed

down since then—a direct result of the economic slowdown. The reason is simple, companies did not

have the cash to buy other companies. In 2005, however, we are seeing a robust economy and

corporate profits, which means that businesses have cash. This cash is being used to buy companies—

mergers and acquisitions.

The end of 2004 saw several deals: Sprint is combining with Nextel, K-Mart Holding Corp is buying

Sears, Roebuck & Co., Johnson & Johnson is planning to buy Guidant. These big corporation deals are

spurring on an environment triggering more acquisitions. The telecom industry, the banking industry,

and the software industry are potential areas for big mergers.

M&AS: A NEW MANTRA IN INDIAN BANKING SECTOR

Corporation Bank is the latest to join the bandwagon of mergers and acquisitions. Following a

statement by Finance Minister Pranab Mukharjee last month, calling for a consolidation of the Indian

banking industry, there has been a spate of announcements from banks, with M&A on their mind.

The board of the directors of Corporation Bank has given in-principal approval for the bank to go

forward with its plan to acquire another bank. Earlier, Indian Bank, which has barely wiped out its Rs


1,600 crore loss, also announced its intentions to acquire another bank. The Chennai-based bank feels

its will acquire a wider reach through an acquisition. Bank of Baroda has also joined the fray, basically

because being a bank with a strong presence in western India, it requires to spread its wings in the rest

of the country.

Ditto goes for Vijaya Bank, Central Bank of India, United Bank of India, Punjab & Sind Bank and

Punjab National Bank. Union Bank of India, on the other hand, already has a national level presence,

but wants to become a global entity and therefore is looking at the acquisition route. The

Government’s recent announcements have also created a positive atmosphere for these developments.

Minister Prithviraj Chavan recently said, "The Indian Government will soon unveil a policy guideline

to encourage mergers and acquisitions in the Indian banking sector."

The policy is expected to provide the impetus for growth in the wake of the Government’s decision to

retain the public sector character by capping the public holding of capital. Further, he said, the rapid

technological advances in the sector also spelt the need for a new breed of regulators and inspectors to

keep amateur hackers and professional techno-thieves at bay.

It is also felt that consolidation of the industry will better help banks raise capital for growth from the

financial market without further liquidating the public sector character in ownership and management.

On the down side, the sector will have to be prepared for issues arising out of compatibility of

technology and human resources. Consolidation and creation of mega banks will also require a clear

focus on lending operations and more intensive retail banking. Public sector banks need to catch up on

these issues.

CONCLUSION

Globalization has increased the competitive pressure in the markets. In a highly challenging

environment a strong reason for M&A is a desire to survive. Mergers and acquisition has become very

popular over the years especially during the last two decades owing to rapid changes that have taken

place in the business environment. Business firms now have to face increased competition not only

from firms within the country but also from international business giants thanks to globalization,

liberalization, technological changes and other changes.

Generally the objective of M&As is wealth maximization of shareholders by seeking gains in terms of

synergy, economies of scale, better financial and marketing advantages, diversification and reduced

earnings volatility, improved inventory management, increase in domestic market share and also to

capture fast growing international markets abroad. But astonishingly, though the number and value of

M&As are growing rapidly, the results of the studies on the impact of mergers on the performance

from the acquirers’ shareholders perspective have been highly disappointing. In this paper an attempt

has been made to draw the results of some of the earlier studies while analyzing the majority of the

mergers and acquitisitions whether they act as strategy to enter new markets along with a combination

of the technological advances that they bring in.

If success is to be achieved in M&A cohesive, well integrated and motivated workforce is required

who is willing to take on the challenges that arise in the process of M&A and there should be proper

organization among employees and they should be provided with proper working conditions. Thus the

mergers and acquitisitions act as roadmaps to enter into new markets as they bring in with them new

technology which is very important for the success and growth of any organization.

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Limited, New Delhi, 2002, Page 3

Merger movements (Table 1)

The economic history has been divided into Merger Waves based on the merger activities in the

business world as:

Period Name Facet

1889 – 1904 First Wave Horizontal mergers

1916 – 1929 Second Wave Vertical mergers

1965 – 1989 Third Wave Diversified conglomerate mergers

1992 – 1998 Fourth Wave Co generic mergers; Hostile takeovers; Corporate Raiding

2000 - Fifth Wave Cross-border mergers

Major M&A in the 1990s(Table 2)

Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999:

Major M&A in the 2000s(Table 3)

Top 10 M&A deals worldwide by value (in mil. USD) from 2000 to 2009:

Rank Year Purchaser Purchased Transaction value (in

mil. USD)

1 2000 Fusion: America Online

Inc. (AOL)

Time Warner 164,747

2 2000 Glaxo Wellcome Plc. SmithKline Beecham Plc. 75,961

3 2004 Royal Dutch Petroleum

Co.

Shell Transport &

Trading Co

74,559

4 2006 AT&T Inc. BellSouth Corporation 72,671

5 2001 Comcast Corporation AT&T Broadband &

Internet Svcs

72,041

6 2009 Pfizer Inc. Wyeth 68,000

7 2002 Pfizer Inc. Pharmacia Corporation 59,515

8 2004 JP Morgan Chase & Co Banc One Corp 58,761

2008 Inbev Inc. 9 52,000

Here are the top 10 acquisitions made by Indian companies worldwide: Table 4

Rank Year Purchaser Purchased Transaction value

(in mil. USD)

1 1999 Vodafone Airtouch PLC Mannesmann 183,000

2 1999 Pfizer Warner-Lambert 90,000

3 1998 Exxon Mobil 77,200

4 1998 Citicorp Travelers Group 73,000

5 1999 SBC Communications Ameritech Corporation 63,000

6 1999 Vodafone Group AirTouch Communications 60,000

7 1998 Bell Atlantic GTE 53,360

8 1998 BP Amoco 53,000

9 1999 Qwest Communications US WEST 48,000

10 1997 WorldCom MCI Communications 42,000


Acquirer Target Company Country

targeted

Deal value ($

ml)

Industry

Tata Steel Corus Group plc UK 12,000 Steel

Hindalco Novelis Canada 5,982 Steel

Videocon Daewoo Electronics

Corp.

Korea 729 Electronics

Dr. Reddyâ€™s

Labs

Betapharm Germany 597 Pharmaceutical

Suzlon Energy Hansen Group Belgium 565 Energy

HPCL Kenya Petroleum

Refinery Ltd.

Kenya 500 Oil and Gas

Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical

Tata Steel Natsteel Singapore 293 Steel

Videocon Thomson SA France 290 Electronics

VSNL Teleglobe Canada 239 Telecom

The highlights of Indian Mergers and Acquisitions scenario as it stands (fig 1)

(Source: http://ibef.org)


Line and Staff: A Critical issue in Administration of Wages and Salary as a factor

of motivation

BASSEY, ANTIGHA OKON (Ph.D.)

Lecturer, Department of Sociology, Faculty of Social Science, University of Calabar

P.M.B. 1105 Calabar C.R.S. – Nigeria

OMONO, CLETUS EKOK



ATTAH, FRANK



ABSTRACT

This paper presents an examination of line and staff concepts which are contemporary in management

discourse. The focus on these concepts was specifically on their application as a basis of determining

employee remuneration. The paper maintains that most organisations pay line employees higher than

staff employees, thereby breeding inter-group conflict in work places. The major effect of preferential

treatment to line employees at the expense of staff employees are: industrial disharmony, low

productivity, poor working relationship, distrust, envy and conflict. The paper recommended among

others the review of laws establishing public organisations like health institutions in order to remove

clauses that ensure preference for line personnel. Such action is expected to restore industrial harmony,

as well as boost productivity of all employees and the organisations. The paper concluded that

preferential wages and salary to line employees demotivates other employees and dampen their

morale, resulting to decline of overall productivity.

Keywords: Line, Staff, Wages, Salary, Motivation, Employees, Administration, productivity and

organisation

INTRODUCTION

Central to the work of any Human Resource Officer is the role of implementing organizational

policies and advising management on how to enhance employees performance in order to ensure

efficiency of the organization. In doing this the Human resources officer is confronted with varieties of

motivational factors and techniques which are all geared towards boosting employees morale for

higher productivity. Such motivational factors include: provision of employees needs, good working

conditions, training, promotion, discipline, high wages and salary. Wages and salary becomes the most

commonly used motivational factors. The structural dynamics and complexity of the organization are

likely to determine if wages and salary are capable of eliciting higher performance from all categories

of employees within the organization. Categorization of employees is determined by organizational

dynamics, such as the concept of line and staff.

This paper is aimed at broadening our understanding of the concept of line and staff, as well as

determining the relationship between line and staff on one hand and wages and salary administration

on the other hand, as it affect industrial harmony and productivity of the organization.


CONCEPTS

Five major concepts are very important to this discussion. They are line and staff, salary and

wages, and motivation. The concepts need clarification to aid our understanding of their applicability.

Line and Staff: There are two broad senses or definitional perspectives to the concept of line and

staff, as opined by Koontz, O'Donnell and Weihrich (1980:395). First, the perspective that "Line

functions are those which have direct responsibility for accomplishing the objectives of the enterprise,

while staff refers to those elements of the organization that help the line to work most effectively in

accomplishing the primary objectives of an enterprise. In this regard, such services as accounting and

personnel are staff functions in an Engineering firm, while engineering construction is the line

function.

Secondly, is the focus on line and staff in terms of functional relationship to authority within an

organization. From this point of view, line constitutes "that relationship in which, a superior exercises

direct supervision over a subordinate - an authority relationship in direct line" (Koontz, O'Donnell and

Weihrich, 1980:397). To this end, "the nature of staff relationship is advisory". The advisory role of

staff does not place staff officers within the hierarchy of authority in the organization. From which

ever angle one is likely to focus on these two perspectives of line and staff are interwoven, and thus,

perspective two merely becomes an alternative explanation. This can be buttressed with a simple

organogram.

From the diagram above, it is worthy to note that the controller of Administration and Finance

often have operating activities in addition to purely staff responsibilities.


Salaries and Wages; Generally, salary refers to a fixed amount of money paid for the utilization of

human labour (Ilyin and Motylev 1986:380). Ubeku (1975) noted that salary is paid for a longer

duration; monthly quarterly or yearly in white collar jobs. Wages are fixed regular payment made to an

employee especially a manual worker for shorter duration, this is daily or weekly. Salary comprises a

good number of sub-heads of payment to employee, and includes: Basic salary, utility, rent allowance,

luncheon; meal subsidy; transport; journal allowance, call-duty allowance, shift duty allowance, over-

time allowance, etc. The application of these allowances vary from profession to profession and from

organization to organization, thereby resulting in wage or salary differential among professions, and

organizations.

Motivation; Nwachukwu (1988:181) defines motivation as "there energizing force that induces

or compels and maintains behaviour". There are three major approaches to motivation, namely, need

approach; incentive, reward and punishment approach; and task structure approach. There are various

theories of motivation such as McGregor theory X and Y, John Adair Functional theory, Blake and

Mouton Managerial Grid theory, Herzberg Hygiene-Motivation theory etc. (Ubeku 1975) all fall

within the first two approaches, while the third approach comprises such personnel management

techniques as job enrichment, jobs enlargement, job design and job rotation etc.

Ubeku (1975) identified remuneration as a basic factor of motivation, because it is through

payment of salary that the physiological needs of individual within the organization as postulated by

Abraham Maslow (comprising food, cloth, shelter and sexual satisfaction) can be achieved. Therefore,

salary and wage administration which is one of the most commonly applied motivational factors need

to be examined within the context of complex organization with conflictual internal dynamics of line

and staff relationship.

IMPLICATIONS OF LINE AND STAFF ON SALARY DRIVEN MOTIVATION; A

DIAGNOSTIC OF COMPLEX ORGANIZATIONS

All Human Resource officers operate within the confines of an organization, which is "the

planned coordination of the activities of a number of people for the achievement of some common,

explicit purpose or goal, through division of labour and function, and through a hierarchy of authority

and responsibility, (Schein, 1990:15). The organization strives to achieve the objectives for which it

was established, the achievement of which is central to its survival. To efficiently realize its objectives,

managers in organization have to motivate employees through high and sustainable salary, which can

help them satisfy their numerous needs. The definitions above suit a formal work group organization

whether public or private. An organization is complex when it can be segmented into different groups

of employees with diversity of professions. Most complex organizations are line and staff where

decisions are made by line executives with the advice of staff executives, who are experts in their

fields like accountants and personnel officers.

This concept of line and staff dichotomizes employees in organization into two major groups.

The line group and the staff group. Administration of wages in some organisations do follow these two

groupings strictly. Wages and salaries are subject to negotiations in the organized private sectors and

there is the same provision in the public sector, with the National Commission for wages and salaries

as the Apex institution in public service salary determination in Nigeria.

The line employees in most organizations are well organized into industrial unions through

which they negotiate with their employers for salary and other benefits. The bargaining power of this

line oriented industrial organizations are strong because any industrial action (e.g strike) by them are

likely to disrupt the entire activities of the organization (Yusufu, 1984). Therefore, management is

often compelled to comply with line industrial unions at the expense of the staff unions, where the later

even exists


The staff industrial unions are not as strong as their line counterpart, because their actions are

not likely to halt the entire organizational processes to a stand-still. Therefore, management is not

bound to comply with staff unions' demands to their utmost satisfaction and desires. In an organization

where line and staff employees coexist, the situation is bound to bring about industrial conflict and

disharmony, which, Yusufu (1984:147) defined as a disagreement between a trade union and an

employer or group of employers following failure of the one side to meet the demand of the other for

the amelioration or removal of a grievance or grievances" leading to various forms of industrial action

such as: go slow; work to rule; strike; lock-out" the effects of which are diverse both to the workers

and to the organization.

Now our focus shifts to wages and salary, which are considered to be factors of motivation.

Where management succumbs to the demands of line employees in terms of salary increase without

corresponding increase of staff employee's salary there is going to exist wage differential within the

organization. The resultant effect has a lot of implications towards employees and organizational

performance.

Effects on Staff: Motivation is all about increasing the output of employees but how a particular drive

factor like wages is administered may rather demotivates. Where certain employees are paid higher

than others due to differential incentives, those with less pay are demotivated. The staff employees

who are affected feel less important and irrelevant to organizational success. According to Umoren

(1990) they are likely to express withdrawal tendency and alienation from work. There the

productivity of staff employees overtly declined towards zero level.

Effects on Organization: The line employees cannot function effectively well without the

Cooperation and support of staff employees (Nwachukwu, 1985). Thus, the attempt by line officers to

steer the organization ahead will meet with total frustration. Hence, the organization can not move

forward and achieve the objectives for which it was set to achieve. Let us briefly examine two cases.

CASES OF LINE AND STAFF CONFLICT

There are some citable cases of Line and Staff conflict regarding salary administration in

Nigeria. Prominent among which are the University Industrial Crisis of the 80's and 90's as well as the

Health institutions' crisis. In the University, there a re two categories of employee, namely; The

Academic staff, and Non Academic Staff. Academic staff are teaching staff whose functions correlate

directly with the aims and objectives for which Universities were established. Thus academic staff are

line employees while non-academic are staff employees. The industrial disputes of the 80's and 90's

and even of today have been continuous demands for increased take home pay by academic staff. Most

times these demands are through increase of academic allowances viz; journal, research, examination

supervision etc. These allowances are not applicable to non-academic staff and often result in the staff

employees taking home less than their academic counterparts in the same salary scale and step. The

greatest problem is that of increase in basic salary with the introduction of different salary scales:

UASS (consolidated University Academic Staff Salary Scale) and CONTISS (Consolidated Tertiary

Institution Salary Scale) this kind of problem often leads to further strike by non-academic staff/who

feel alienated in the scheme of things. The University cannot function well without Accountants,

Personnel Officers, Engineer, Cleaner, Technologists, Demonstrators, Porters, Security-men etc who

are all non-academic staff. Hence, they deserve certain compensation as being within the system,

because they are all experts in their own fields.

This problem becomes more complex in tertiary Health Institutions like Specialist and

Teaching Hospitals. Here, the line employees are sub-categorized, like doctors, Nurses, Pharmacists,

Physiotherapists, Radiologist etc., operating side by side with non-clinical staff like administrators,

caterers, accountants, engineers and technicians. The Clinical staff are line staff with strong unions like


A. R. D. (Association of Resident Doctors), NANNM (National Association of Nigerian Nurses and

Midwives) etc. while the other staff employees lack unions with strong cohesion and binding force to

negotiate increased pay. The true picture of this situation can be revealed in the two weeks ultimatum

for government to review what Medical Technologists and Professions Allied to Medicine

(NUPMTPAM) described as "the discriminating package of incentives just approved for medical

workers (Vanguard June 20, 2001).

Similar warning was given by Senior Staff Associating of Nigerian Universities (SSANU) that

"the Federal Government should ensure that no disparity exists on the basic salary structure of

University staff as such that will engender disharmony in the system'. From these two examples it is

clearly revealed that salary administration is a difficult task as it pertains to line and staff organization.

What then can a human resource officer do?

THE DILEMMA OF HUMAN RESOURCE OFFICER

Industrial relation is a core Human Resource Management function and part of the schedule of

any personnel officer (Ubeku, 1975), but it is not uncommon for it to be under the Corporate or Public

Affairs department. But where-ever Industrial Relations is located, it is the personnel officer who will

be directed to query, dismiss or terminate the appointment of staff who engage in industrial action, as a

result of which the personnel manager becomes a key player in industrial relation management.

In public sector organizations, as exemplified in the two cases above, the personnel officer is

one of the victims. He is considered as a staff officer, whether in the University, Hospital, Banks or

Factory, but his functions and effectiveness are critical to the success or failure of the organization, as

he manages the most critical, and important variable or resource of the organization (Human

Resource). He is the instrument of actualization of management policy which may also be to his

detriment. He discovers himself as not being part of the line (Production) or direct hierarchical

(authority), nor part and parcel of management. But his actions are wholly implementation of

management decisions, he is thus seen by other staff employees as representing management and being

part of it. This is the very dilemma of the personnel manager.

Despite the situation the personnel manager finds himself, he perform his function with utmost

efficiency by ensuring industrial harmony in the organization, advising management in all aspects

necessary to ensure industrial peace, harmony and the co-operation of all employees to achieve

organizational goals. This can only be achieve if certain conditions are put in place, as provided for in

the recommendations hereunder, specifically for preventing salary differential on line staff dichotomy.

RECOMMENDATION /CONCLUSION

To herald other recommendations is the recommendations contained in one of the communique

of the 2001 Annual Industrial Relations Forum of the Institute of Personnel management of Nigeria

(The Punch June 18, 2001), that:

"Corporate organizations in the public and private sectors should integrate HRM into their

corporate strategic management process and recognize the HR practitioner as an internal consultant to

line managers who should be assisted to perform traditional personnel functions to enable the HR

practitioner focus more on strategic human resources issues’’

If this is taken, the perception of other employees about the personnel officer will change to a

more positive comradeship relationship, and the personnel manager will have more time to focus on

strategic functions including industrial relations. Public institutions like the University and other semi-

autonomous institutions should be given power of wage determination and administration. There


should be machinery for collective negotiation in sectors with multiple industrial unions to ensure

harmony, equity and fairness. More training and re-training programmes should be given to Personnel

Officers/Industrial Relations Officer as well as unionists in public and private organizations in various

aspect of industrial relations, conflict resolution to ensure industrial harmony in our organizations. To

this end, the Nigerian Institute of Personnel Management should Champion Industrial Relation

education in our country.

In conclusion, line and staff is a critical issue in the administration of wages and salary, which

must be closely studied and analyzed by Human Resource officer in any organization, in order to

advise management accordingly to avoid wage and salary differential which is likely to disrupt

industrial harmony and hinder the realization of organizational goal. Public and private sector should

harmonise salary to prevent disparity in order to foster industrial peace, which is a necessary ingredient

of productivity and corporate survival.

REFERENCES

Bassey, Antigha (2004). ‘‘Line and Staff: A critical issue in Administration of Wages and Salary as a

Factor of Motivation’’ Paper presented at Chartered Institute of Personnel Management

Nigeria, Cross River State Branch, July Monthly Lecture Series

Blake, R. and Merton, J. (1985). The managerial grid III. Houston: TX Gulf

Herzberg, F. (1966). Work and the Nature of Man. Cleveland: OH-World

Illyn, I. and Motylev, V. (1986). What is Political Economy. Moscow: ABC Publication

Koontz H, O'Donnell C., Wechrieh H., (1980): Management. Tokyo: McGraw- Hill International Book

Company.

McGregor, D. (1960). The Human Side of Enterprise. New York: McGraw-Hill

Nwachukwu, C., (1988): Management Theory and Practice. Onitsha: African - FEP Published Limited.

Schein, E. (1990); Organizational Psychology, Englewood Cliffs: Prentice- Hall Inc.

The Punch Monday, June, 18th, 2001. Page 17.

Ubeku, Abel (1975): Personnel Management in Nigeria Benin: Ethiope Publishing Corporation.

Umoren, U. (1990): Principles Leadership Behaviour and Teachers Alienation from Work in Akwa

Ibom State, Ph. Thesis, Unpublished University of Calabar.

Vanguard Wednesday. June 20, 2001

Yesufu,T. (1984): The Dynamics of Industrial Relations: The Nigerian Experience, Lagos: University

Press Limited.


Profitability and Credit Culture of NPAs : An Empirical Analysis of PSBs

Dr Namita Rajput,

Associate Prof in commerce, Sri Aurobindo College (M)

Ms Ruhi Kakkar

Assistant Prof, Bharti College

Ms Ruchika Kaura

ARSD College

Abstract

Post reform era has changed the whole structure of banking sector of India. The emerging competition

has resulted in new challenges for the Indian banks. Hence, parameters for evaluating the performance

of banks have also changed. This paper provides an empirical approach to the analysis of profitability

indicators with a focal point on non-performing assets (NPAs) of commercial banks in the Indian

context. The paper discusses NPA, Factors contributing to NPA, Magnitude and Consequences. By

using analytical perspective, the paper observed that NPAs affected significantly to the performance of

the banks in the present scenario. On the other hand, factors like better credit culture, managing the

risk and business conditions which lead to lowering of NPAs. The empirical findings using

observation method and statistical tools like DEA, correlation, regression and data representation

techniques, identified that there is a negative relationship between profitability measure and NPAs.

Keywords: Correlation, Emerging Competition, Gross NPAs and Net NPAs, Regression.

JEL Classification: G21, E51, G11, C23

SECTION 1

INTRODUCTION

There is a bank-based financial system in India where banks and financial institutions are the financial

intermediaries for commercial sector credit. Slack appraisal of projects, wrong projection of the

demand of industrial sector, diversion of funds, willful default, political favours, nepotism, etc, have

resulted in “Non Performing Assets” (NPAs). The legal system in India used to be mostly debtor

friendly. Ever since the introduction of financial sector reforms in India, the Non Performing Assets of

the banking system is an off shoot and has hampered the growth of the Indian banking system. The

cost of the intermediation by the banks has raised brows for controlling the interest rates and

identification of benchmarks for the identification and resolution of NPAs. Recently with enhancement

of technology and customer services, innovations of various products, implementation of Basel II,

better risk management systems and implementation of new accounting standards, US sub-prime crisis

and volatile market has made it essential to maintain the NPA with lower level and effective

monitoring before they become bad debts. Non Performing Assets are a serious strain on the

profitability, as banks cannot book income on such accounts, while their funding cost and provision

requirements are charged on their profits. In order to have a proper understanding of the NPA menace,

it is necessary to have an idea of the growth and structural changes that have taken place in the banking

sector. “The financial strength and operational efficiency of the Indian banks and financial institutions

which were working in a highly protected and regulated environment were not measuring up to

international standards” (RBI, 1999). “Every aspect of the functioning of the banking industry, be it

profitability, Non-Performing Asset (NPA) management, customer service, risk management, human

resource development, etc., has to undergo the process of transformation to align with international


best practices” (Muniappan, 2003).This research paper is broadly divided into six sections. Section 1 is

the present section gives a backdrop of NPA menace, magnitude and its impact on the profitability of

Indian banking sector, Section 2 reviews the existing literature on the subject, Section 3 identifies the

research objectives, Section 4 outlines the details of data and methodology used, Section 5 summarizes

the results of this paper. The paper concludes with Section 6 highlighting the conclusions and

recommendations, giving insights to the policy makers. The focus of this paper is to give a

comprehensive view of NPAs and its impact on the profitability of PSBs operating in India.

SECTION 11

REVIEW OF LITERATURE

Non performing assets are an unavoidable burden for each banking industry. The success of banks

depends upon methods of managing NPAs and keeping them within tolerance level. Hence, to change

the curve of NPAs, there is only one technique that an effective monitoring and control policy should

be planned and executed which is aided by proper legal reforms. The problem of NPAs has been

studied over the years to bring insight into the problem of NPAs, its cause and solution. Main focus of

the study is NPA incidence and its management in India (Kumar R., 2000; The Price water house

Coopers Limited, 2002 and Pradeep, 2007).

In the Indian context, the lending policy and credit policy have crucial influence on non-performing

loans (Reddy, 2002 and Karunakar et al., 2008). Confederation of Indian Industry, 1999, refers the

changing perspective about non-performing assets for the betterment of Indian financial system. Some

studies observed that the problem of NPAs is related to several internal and external factors, which

affected the performance of the banks, such as, Chaudhuri S., 2002; Muniappan, 2003; Gupta S. &

Kumar S., 2004; Ghosh, 2005; David, 2007 and Rakhe, 2010. A study supports the policy approach to

the banking in the Indian context, i.e., Dr. R.K.Uppal, 2011. Many studies found the contradictory

relationship between the efficiency and NPAs among all the bank groups, like, Berger et al., 1997;

Demirguc-Kunt et al., 1998; Rajan & Zingales, 1998; Indira R. & Vasishtha G., 2002; Nachiket &

Bhavna, 2002; Gujral N., 2003; Kumbhakar & Sarkar, S., 2003; Davis & Stone, 2004; Das & Ghosh,

2006; Mahesh & Rajeev, 2006; Vallabh et al, 2007; Rao & Tiwari, 2008; Debaprosanna Nandy, 2010.

Some other studies carried out the negative impact of NPAs on the performance of banking sector are

as follows, Naik, 2002; Bhide et al., 2001; Bhaumik et al., 2004; Banerjee et al., 2005; Arpita, 2010

and Mishra N., 2011.

Several studies are based on PSBs and NPA/NPL which also confirmed the conversing impact of non-

performing assets (NPAs) or non-performing loans (NPLs) on the productivity of public sector banks,

for example, Ranjan R. & Dhal S., 2003; Prasad et al., 2004; Mohan, 2005; Misra B. & Dhal S., 2009

and Tandon et al., 2009. These studies support to the usage of panel regression Model to the relation

between profitability and echelon of non-performing assets, like other studies as Bodla & Verma,

2006; Mishra S., 2007 and Acharya et al., 2010.

From a cross-country perspective, many studies have done on the problem of non-performing loans

(NPLs) to let us know that major problems had incurred on overall performance of the banking system

of all these country due to the impact of NPL, for instance, in context of Italy (Sergio M., 1996), US

banks (McGoven J., 1993 and Bloem & Gorter, 2001), Argentina (Bercoff et al., 2002), East Asia (Lee

et al., 2001), Taiwan (Hsihui et al., 2007), Australasia (Kurt Hess, 2007). These countries had needful

corrective steps to manage the situation so that they came out from the problem with downing trend of

non-performing loans. Some researchers considered some more countries like, Spain (Santiago et al.,

2000), USA (Miller & Noulas, 1997 and Veronesi & Zingales, 2009), Japan (Chakraborty & Linda,

2007), China (Ma G., 2006; Allen et al., 2007; Shanker et al., 2008) and South-East Asia (Hawkins J.,

1999) which were focused on NPA and resulted to have bank restructuring for better efficiency of such

banking industry. A few studies compared the level of NPAs among India and other country (Sumant


B., 2003 and Nitsure, 2007). Many other studies have covered the analysis internationally as whole,

e.g., Charnes, Cooper & Rhodes, 1978; Joseph & Weiss, 1981; Bourke, 1989; Duca & McLaughlin,

1990; King & Levine 1993; Rajan & Zingales, 1995; Jayaratne & Strahan 1996; Demirguc et al., 1998;

Beck et al., 1999 & 2000; Caprio et al., 1999; Klingebiel D., 2000; Mitchell, 2001; Dado et al., 2002;

Hanson & Kathuria, 2002; Mukherjee P., 2003; Bonin et al., 2005 and World Bank, 2009.

SECTION III

CONCEPTUAL FRAMEWORK AND RESEARCH OBJECTIVES

3.1 CONCEPTUAL FRAMEWORK

THE TERM OF NPAS

Banking business is mainly that of borrowing from the public and lending it to the needy persons and

business at a premium. Lending of money involves a credit risk. When the loans and advances made

by banks or financial institutions turn out as non - productive, non-rewarding and non – remunerative,

they become Non Performing Assets (NPA). According to SARFAESI 2002, NPA is an asset or

account of a borrower, which is classified by a bank or financial institution as sub-standard asset,

doubtful asset and loss asset.

The definition of an NPA as given by RBI and its various categories is as under:

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the

bank. A non performing asset (NPA) is a loan or an advance where;

i. interest and / or installment of principal remain overdue for a period of more than 90 days in

respect of a term loan,

ii. the account remains 'out of order' in respect of an Overdraft / Cash Credit (OD/CC),

iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and

discounted,

iv. the installment of principal or interest thereon remains overdue for two crop seasons for short

duration crops,

v. the installment of principal or interest thereon remains overdue for one crop season for long

duration crops,

vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a

securitisation transaction,

vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market

value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due

date for payment.

Banks should, classify an account as NPA only if the interest due and charged during any quarter is not

serviced fully within 90 days from the end of the quarter.

CATEGORIES OF NPAS

Banks are required to classify non-performing assets further into the following three categories based

on the period for which the asset has remained non-performing and the realisability of the dues:

(1) Substandard Assets: With effect from 31 March 2005, a substandard asset would be one, which

has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of

the borrower / guarantor or the current market value of the security charged is not enough to ensure

recovery of the dues to the banks in full. In other words, such an asset will have well defined credit

weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility

that the banks will sustain some loss, if deficiencies are not corrected.


(2) Doubtful Assets: With effect from March 31, 2005, an asset would be classified as doubtful if it

has remained in the substandard category for a period of 12 months. A loan classified as doubtful has

all the weaknesses inherent in assets that were classified as substandard, with the added characteristic

that the weaknesses make collection or liquidation in full, on the basis of currently known facts,

conditions and values - highly questionable and improbable.

(3) Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external

auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an

asset is considered uncollectible and of such little value that its continuance as a bankable asset is not

warranted although there may be some salvage or recovery value.

FACTORS CONTRIBUTING TO NPAS

Diversification of funds for expansion/ modernization, undertaking of new projects and also for

helping associate concerns. This is coupled with recessionary trends and failure to tap required

funds in the capital and debt market.

Business (Product, marketing, financial) failure, inefficient management, strained labor relations,

inappropriate technology, outmoded machinery, technical problems and product obsolescence.

Recession, input and power shortage, price escalation, accidents, natural calamities, external

problems in other countries leading to non –payment of overdues.

Time and cost overrun during project implementation stage.

Government policies like changes in excise duties, pollution control, poor credit decisions, and

priority sector lending and outdated legal systems.

Willful default, siphoning off funds, fraud and misappropriation by promoters and directors

dispute.

Deficiencies on the part of banks like delay in release of funds and delay in release of subsidies by

government.

Delay in finalization of rehabilitation package.

Absence of portfolio concentration limits, poor industry analysis, cursory financial analysis of

borrowers.

Excessive reliance on collateral, absence of follow-up action by banks, poor control on loan

documentation.

IMPACT OF NPAS ON BANKING OPERATIONS

The efficiency of a bank is not reflected only by the size of its balance sheet but also by the level of

return on its assets. The NPAs do not generate interest income for banks. At the same time, banks are

required to provide provisions for NPAs from their current profits. The NPAs have deleterious impact

on the return on assets in the following ways:

1. The interest income of banks will fall and it is to be accounted only on receipt basis.

2. Banks profitability is affected adversely because of the providing of doubtful debts and consequent

to writing it off as bad debts.

3. Return on investments (ROI) is reduced.

4. The capital adequacy ratio is disturbed as NPAs enter into its calculation.

5. The cost of capital will go up.

6. Asset and liability mismatch will widen.

7. It limits recycling of the funds.

MAGNITUDE OF NPAS IN INDIA

The liberalization regime which was launched in July 1991 opened the doors to the entrepreneurs to set

up industries and business, which are largely financed by loans from the Indian banking system. There

were, however, shakeouts with many businesses failing and loans becoming bad. In the global

economy prevailing, the vulnerability of Indian businesses had increased. Constant follow- up action


and vigil needed to be exercised by the operating staff. There was also a trend of willful neglect and

default of funds. As per a study published in the RBI bulletin in July 1999, diversion of funds and

willful default were found to be the major contributing factors for NPAs in public and private sector

banks.

Today, the situation looks optimistic with the industry succeeding in overcoming the hurdles faced

earlier. The timely restructuring and rehabilitation measures have helped to overcome setbacks and

hiccups without seriously jeopardizing their future. The credibility of corporate sector has increased

manifolds with greater transparency in policies and stricter corporate governance methods. The

abrasion rate in corporate sector has come down. The challenges before the banks in India today are

the rising NPAs in the retail sector, propelled by high consumerism and lowering of moral standards.

A glance through the statistics on the movement of non-performing assets (NPAs) in scheduled

commercial banks helps to understand the extent to which they are standing.

3.2 RESEARCH OBJECTIVES

The objective of this paper is to analyze the nature, extent and magnitude of NPAs of SCBs, as a

group. This study also analyses the impact of NPAs on the profitability of PSBs operating in India.

Further, the study could provide useful insights to assess if the changes in efficiency of banks have

been in the desirable direction and also useful in regulation and formulation of policies.

The objectives of this paper are as under:

To analyze the nature, extent and magnitude of NPA in Indian banking sector.

To examine the relationship between NPAs and profitability measure (ROA) of banks.

Hypothesis 1: The Gross and the Net NPAs and its magnitude has shown a sharp decline in the study

period (from 1997-98 to 2009-10).

Hypothesis 2: The negative correlation between NPAs and determinants of profitability of government

owned banks (public sector banks) operating in India.

SECTION IV

DATA AND METHODOLOGY

The public sector banks dominate the banking industry in terms of branch expansion, deposits and

lending to priority sector etc. (Table 1). Accordingly, the scope of the present study is limited to Public

Sector Banks only, as it was not feasible to take simultaneously all the banks operating in India.

Therefore, the focus of analysis and discussion in this paper is mainly on the public sector commercial

banks. As we know, there are presently 27 banks in public sector in India, the analysis of all of them

has been made with the objective of identifying the determinants of NPAs and its relationship with

profitability.

Table 1: A Synoptic View of Indian Banking Sector

S. No. Variables 1997-98 2001-02 2005-06 2009-10

1. Branches

Public Sector Banks 45368 46118 50168 61301

Private Sector Banks 4872 5376 6835 10387

Foreign Banks 186 202 259 310

2. Deposits




Foreign Banks 42539 67873 113745 237853

3. Lending



Foreign Banks 7384 13414 27045 60290

Source: RBI Publication.

The data relating to these variables have been collected from the annual reports of banks, Journal of

Indian Banking Association, Reserve Bank of India’s Bulletin and Internet (www.rbi.org.in). In this

study, the reference period is 13 years from 1997-98 to 2009-10. This period is selected mainly

because banking sector of our country resorted to speedy reforms and liberalization. In order to

identify the variables that have high explanatory powers and are therefore, more important in

managing the operations of a bank, Correlation and OLS Regression Model are applied.

Mathematically the equation of regression model is as follows:

{Y= a+b1x1+μ………} ………………….. (i)

{Y= a+b2x2+μ………} ………………….. (ii)

Where, Y= ROA (Return on Assets),

a= constant term,

b1 & b2 = Regression coefficients for the respective variables,

x1 = GNPA Ratio and x2 = NNPA Ratio

μ = Error Term

Here, Y (i.e. ROA) is the dependent variable, while x1 & x2 are independent variables. At the outset,

the test of significance of overall multiple regression models were made through F-test. This test has

been used to answer the basic question: Is there a linear relationship between dependent variable and

any of the independent variables under consideration? To carry out the F-test the analysis of variance

(ANOVA) is performed. Further Multiple Coefficient of Determination (R Square) and Adjusted

Multiple Coefficient of Determination (Adjusted R Square) were also compiled to measure the

explanatory power of multiple regression model used herein. With the aim of evaluating the

significance of individual regression coefficients (Beta), t-test was performed at 0.05 levels of

significance. Durbin-Watson (D/W) Test has been employed to comment on the presence/absence of

the problem of auto-correlation in the time series data employed herein. Moreover, to bring out the

explanatory powers of each of the independent variables under study, the square of partial correlation

coefficient (i.e. Partial coefficient of determination) of each variable have been worked out.

An important problem that may arise in making inferences about individual regression coefficient is

‘multicollinearity’ the problem of correlation among the independent variables themselves. Due to this

the standard errors of the individual slope estimators become usually high, making the slope

coefficient seem statistically not significant. The variables causing multicollinearity were dropped

from the model by using ‘backward elimination’. It also needs to mention that the data collected is

processed and analyzed with the help of SPSS software.

SECTION V

ANALYSIS AND INTERPRETATIONS OF RESULTS

Hypothesis 1: The Gross and the Net NPAs and its magnitude has shown a sharp decline in the study

period (from 1997-98 to 2009-10).

The accumulation of huge non-performing assets and its depth in banks has assumed greater attention

and importance. The depth of the problem of bad debts was first realized in early 1990s. Gross NPA

reflects the quality of the loans made by banks, while Net NPA shows the actual burden of banks. The

http://www.rbi.org.in/


banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic

approach. The soundness of a bank may be seriously impaired if its asset quality is poor. Non-

performing assets require provisioning/write-off, which affects banks’ profitability and their ability to

strengthen their capital position. In case the provisioning or write-off results in net losses, it could also

erode bank’s capital position. Therefore, apart from sound capital position, it is necessary that banks

maintain high asset quality. The level of non-performing loans is recognized as a critical indicator for

assessing banks’ credit risk, asset quality and efficiency in allocation of resources to productive

sectors. Reflecting the success of financial sector reforms and regulatory and supervisory process in

particular, banks have made substantial progress in cleaning up the NPAs from their balance sheets.

In India, non-performing assets of commercial banks gradually declined over the years, such as, Gross

NPAs (GNPAs) as % to Gross Advances from 14.4% in 1997-98 to 2.2% as on 31st March 2010 and

Gross NPAs as % of Total Assets become 1.2 % in 2009-10 from 6.4% in 1997-98 whereas, Net NPAs

(NNPAs) as % of Net Advances from 7.3% in 1997-98 to 1.0% as on 31st March 2010 and Net NPAs

as % of Total Assets has left only 0.5% in 2010 from 3.0% in 1997-98 (exhibited in table 2 with a clear

picture in fig 1).

Table 2: Gross and Net NPAs of SCBs (Amount in Rs. Crore)

Years Gross

NPAs

Amount

GNPA Ratio as

% of G.

Advances

GNPA Ratio

% of Total

Assets

Net NPAs

Amount

NNPA Ratio %

of N. Advances

NNPA Ratio

% of Total

Assets

1997-98 50815 14.4 6.4 23761 7.3 3.0

1998-99 58722 14.7 6.2 28020 7.6 2.9

1999-00 60408 12.7 5.5 30073 6.8 2.7

2000-01 63741 11.4 4.9 32461 6.2 2.5

2001-02 70861 10.4 4.6 35554 5.5 2.3

2002-03 68717 8.8 4.1 29692 4.0 1.8

2003-04 64812 7.2 3.3 24396 2.8 1.2

2004-05 59373 5.2 2.5 21754 2.0 0.9

2005-06 51097 3.3 1.8 18543 1.2 0.7

2006-07 50486 2.5 1.5 20101 1.0 0.6

2007-08 56309 2.3 1.3 24730 1.0 0.6

2008-09 68973 2.3 1.3 31424 1.1 0.6

2009-10 84745 2.2 1.2 39125 1.0 0.5

Source: RBI Publication.

Fig 1: Gross and Net NPAs Ratio of SCBs as % of Gross and Net Advances respectively

The analysis showed a declining trend in the ratio of GNPAs and NNPAs which leads us to accept our

hypothesis, which is a clear indication that the measures adopted by the banks are effective in

controlling the menace created by NPAs. It is very important to control the problem of NPAs as there

are many problems which are magnified because of its magnification like, Owners and Depositors do

Movement of NPA Ratios

0

5

10

15

20

1 2 3 4 5 6 7 8 9 10 11 12 13

Year-wise Data

NPA

Rat

ios

(in %

)

Gross NPA Ratio Net NPA Ratio


not receive a market return on their capital. In worst cases they lose their assets. Non performing loans

epitomize bad investment. They misallocate credit from good projects, which do not receive funding.

Non performing asset may spill over the banking system and contract the money stock, which may

lead to economic contraction and affect its liquidity and profitability.

Hypothesis 2: The negative correlation between NPAs and determinants of profitability of government

owned banks (public sector banks) operating in India.

Managing NPAs has a lot to do with managing productive assets and ensuring effective corporate

governance. If performing assets are turning into NPAs, it is because there is lot that happens to

change the quality of assets. As of now, NPAs in most of the nationalized banks are within the

permissible limits. However, they have not been able to bring additional capital for expanding their

business operations through internal generations, but have done so through the equity market. Banks

have taken recourse to the debt market or by pleading their case with the government for

recapitalization. In this backdrop it becomes very important to understand the relationship of Non-

performing assets and profitability, whether decrease in NPAs leads to increase in profitability or not.

This information is very vital in monitoring, regulating and policy formulation.

Correlation is calculated taking three ratios, two are related to NPAs as GNPA Ratio (Gross Non-

Performing Asset Ratio) and NNPA Ratio (Net Non-Performing Asset Ratio) with the profitability

measure as ROA (Return on Assets). Results are exhibited in table 3 and shown by figures (fig2 and

fig 3).

Table 3: Correlation of NPA and ROA for PSBs During the period from 1996 to 2010

Variables Correlation

GNPA Ratio with ROA -0.60164

NNPA Ratio with ROA -0.65987

Fig 2: Correlation b/w GNPAs and ROA Fig 3: Correlation b/w NNPAs and ROA

There is a high degree of negative correlation between GNPA Ratio with ROA (-0.60264) and NNPA

Ratio with ROA (-0.65987) as shown in above figures. An inverse relationship clearly defines that if

non performing assets are controlled, it increases the profitability. The above graphs indicate that by

decreasing the ratios, there is an increase in return on assets which is a measure of profitability. The

above relationship is also supplemented and strengthened by the most popular method OLS

(ORDINARY LEAST SQUARE) to have more clarity on the issue, taking ROA as dependent variable

and GNPA Ratio and NNPA Ratio as independent.

Table 4: Model Summary and ANOVA (F) Results for PSBs during 1998-2010

Variables/Measures R R2 Adjusted R

2 F-value P-value Durbin-Watson

GNPA Ratio 0.602 0.362 0.304 6.241 0.030 1.229

NNPA Ratio 0.660 0.435 0.384 8.484 0.014 1.270

0

2

4

6

8

10

12

14

16

18

1 2 3 4 5 6 7 8 9 10 11 12 13

Year-wise Data

GN

PA

Rati

o &

RO

A

GNPA RATIO ROA

0

1

2

3

4

5

6

7

8

9

1 2 3 4 5 6 7 8 9 10 11 12 13

Year-wise Data

NN

PA

Rati

o &

RO

A

ROA NNPA Rat io


Table 4 reveals F value is significant at 0.05 level for both ratios. It is clearly indicating that the

variation caused by independent variables in the value of ROA is significant and cannot be left to

chance factors. It is also noteworthy that there is no problem of serial correlation in the time series data

utilized for the study, as the values obtained by Durbin-Watson test, are around one. The above permits

us to proceed further to analyze the results produced by the Multiple Regression Model so as to

achieve the objective of analyzing the relationship of NPAs with profitability of banks. The value of

Correlation Coefficient (R) and Coefficient of Determination (R square and Adjusted R square) of the

finally selected model are less then one (table 4), which shows the relationship of NPA and

profitability is significant at 5% level of significance (P-Value 0.030 & 0.014 respectively).

Therefore, it is evidently proved that NPAs (GNPAs and NNPAs) has an inverse impact on ROA or

profitability of banks, that means the bank can have an increasing trend of ROA by the effect of the

declining trend of GNPAs and NNPAs ratios. This leads us to accept the hypothesis that there is a

causal relationship between profitability measure and non-performing ratios. The above analysis would

help in improving the quality of assets of banks. In turn the requirement for provisioning would

automatically come down and it will directly add to the profit of banks.

SECTION VI CONCLUSIONS AND RECOMMENDATIONS

The analysis concluded that there is a diminishing trend in the ratios of non-performing assets as

GNPAs and NNPAs, which

of negative correlation between NPA Ratios with ROA. Multiple Regression model has also repetitive

the results that there can be an enhancement in profitability of the banks if the NPAs has decreasing

trend continuously. Consequently, an inverse relationship among profitability and non-performing

assets revealed the fact, that the bank can have an increasing trend of profitability only by the effective

declining trend of NPAs. The assessment would help to improve the assets quality of banks, so that,

provisioning requirement would automatically come down and it added to the profits directly which

leaded to increase the overall performance of the banks. Hence, it’s important to manage the level of

NPAs for Owners and Depositors also, as they are faced many problems due to the magnification of

non-performing assets, even they couldn’t receive their appropriate return on their capital or can be

lose their assets. Non performing assets epitomize non-performing loans, which misallocate credit

investments from needful projects. It may spill over the banking system and contract the money stock,

which may lead to economic contraction and affect its liquidity and profitability.

It can be accomplished that as present environment is fraught with risks of various kinds and

dimensions, a tested and sound credit-risk model has to be put in place to have proper perception of the

risk in a proposal and decide on the acceptability or otherwise and to take mid-course correction in

respect of existing accounts. Though total elimination of NPAs is not possible in banking business as

elements of risk is an inseparable ingredient, especially in the present context of the externalities

fraught with risk. But, by effective management, its incidence can only be minimized.

The adage ‘prevention is better than cure’ or ‘a stitch in time saves nine’, hold good in the monitoring

of credit portfolio and arresting fresh generation of NPAs is equally important as recovery of NPAs. In

a banking system, NPA is inevitable and cannot be totally eliminated. What needs to be done is to

arrest fresh accretion and contain it to the barest minimum by preventing slippage through effective

proactive steps and that too at the right time.

RECOMMENDATIONS Arresting slippage of accounts through relentless monitoring and focus on the continuous

viability of the borrowing concern with improved asset classification is must. At the same time

all accounts in the Standard category should not be taken for granted and should be subjected to


periodical and in-depth review in a systematic manner through a sound adequate loan review

mechanism in place.

Categorization of standard accounts into A, B, C based on actual recovery of interest and

installments due, will help a focused and strengthened monitoring.

Banks should ensure that they should move with speed and charged with momentum in

disposing off the loss assets. This is because as uncertainty increases with the passage of time,

there is all possibility that the recoverable value of asset also reduces and it cannot fetch good

price. If faced with such a situation than the very purpose of getting protection under the

Securitization Act, 2002 would be defeated and the hope of seeing a must have growing

banking sector can easily vanish.

Bank should adhere to “Know Your Customer” norms for identification of borrower, guarantor

and verification of their addresses to minimize the risk of default in case of housing sector

lending. In respect of agricultural advances, recovery camp should be organized during the

harvest season.

Ongoing monitoring of bank’s borrowers is important to understand the primary cause of

corporate decline and to be able to identify the symptoms of a potential distress situation. Loan

Officers and staff should be alert and diligent for signs of borrower distress. It is essential to

identify signs of distress which diminish the Borrowers capacity to repay debt. Early

recognition followed by appropriate action is essential if the bank is to minimize NPAs.

Loan Workout Unit should be created which should be exclusively responsible for managing

non-performing and under performing loans to maximize the recovery value from a portfolio of

distressed loans, through the employment of an equitable and professional workout process.

SECTION VI

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Corporate Social Responsibility in Malaysia: The Role of Corporate Sector in

Supporting the Community and the Environment

Abdullah Sarwar & S.M. Ferdous Azam,

PhD Candidate, Faculty of Economics and Management Sciences,

Department of Business Administration, International Islamic University Malaysia

Abstract

In this competitive era of global business entity, no company can ignore the public interest. Companies

have to realize that in order for them to ensure continued existence, their practices will have to be

altered in such a way that they not only focus on the conventional quest of profits but also take into

account the social and environmental spectrum. Hence, our interest in this paper was to find out the

business motivation behind engaging in CSR activities; the areas that CSR revolves around, whether,

CSR is truly beneficial to both businesses that practice it and the community as a whole and how

corporations in Malaysia view CSR. This study reveals that the Bursa Malaysia has set guidelines for

Malaysian Public Listed Companies (PLC) to help them in the practice of CSR. However, companies

should not take this as to improve their image, but an inherent and vital business practice that promotes

ethical values, social responsibility, and awareness to environmental problems, social issues and so

forth. Bursa Malaysia strongly urges Malaysian PLCs to adhere to CSR not because they are legally

bounded to but because value the importance of CSR. Therefore, companies should practice CSR to

assist the community in order to advance both economically and socially in the global economy.

Introduction

In the last two decades there has been a tremendous change in the relationship between the corporate

sector and society. The evolution of this relationship has brought about this new concept of Corporate

Social Responsibility (CSR) (Cochran, 2007). In fact, no longer can businesses act as independent

entities ignoring the public interest. Companies have begun to realize that in order for them to ensure

continued existence, their practices will have to be altered in such a way that they not only focus on the

conventional quest of profits but also take into account the social and environmental spectrum

(Pomering & Dolnicar, 2008). Globalization, in particular, has triggered a sense of responsibility for

many multinational firms to penetrate developing markets. These multinational companies now have to

handle extremely sensitive issues such as corruption, oppression, fraud, baffled human rights and child

labor to cite a few (Pirsch, Gupta & Grau, 2007). However, most of the time, these issues,

unfortunately, result in firms dealing with impossible dilemmas.

What is Corporate Social Responsibility (CSR)?

CSR is about more than environmental responsibility or having a recycling policy. CSR is about

considering the whole picture, from the internal processes to the clients, taking in every step that any

business takes during day-to-day operations (Teoh & Thong, 1984). Mohr, Webb and Harris (2001:

45) defined CSR as “a corporation's commitment in minimizing or eliminating any harmful effects and

maximizing its long-run beneficial impact on society.” CSR can also be defined as the process of

assessing an organization’s impact on society and evaluating their responsibilities (Andrew, Gul,

Guthrie & Teoh, 1989). According to Mathews (1997), CSR begins with an assessment of a business

and the relationship it has with its key stakeholders. There is an enormous pressure exercised by the

general public who rejects unethical business practices and organizations who act irresponsibly, on

businesses. Advances in social media (giving everyone a voice) mean that negative or destructive


practices quickly fuel conversations online (Saleh, 2009). Consequently, organizations are accountable

for their actions like never before.

World Business Council for Sustainable Development (2012: 3) defines CSR as “the

continuing commitment by business to behave ethically and contribute to economic development while

improving the quality of life of the workforce and their families as well as of the local community and

society”. While The European Commission advocates CSR as “Being socially responsible means not

only fulfilling legal expectations, but also going beyond compliance and investing more into human

capital, the environment and relations with stakeholders.”

Hence, it is important to distinguish between social obligation and social responsiveness.

Companies are increasingly moving from legally bounded social practice that defines their social

obligation to voluntary social practice, which stems from their own will to be socially responsive

(Beattie & Jones, 2001). Furthermore, Clarke, J., & Sweet (1999) have pointed out that, socially

responsive businesses make additional commitment to improve the social and economic status of the

various stakeholders (employees, customers, suppliers, shareholders, and the society in general), while

still complying with the legal requirements. As such, CSR takes organizations beyond compliance with

legislation and leads them to honor ethical values and respect people, communities and the natural

environment (Hamid, Fadzil, Ismail & Ismail, 2007).

The pre-60’s era was characterized by a virtually non-existent CSR, as the social responsibility

of business was not widely considered a significant problem, and governments were more preoccupied

by conflicts and wars (Park & Adnan, 1994). However, the authors further explained that, in that

period, social responsibility has become an important issue for businesses in both theory and practice.

In effect, a number of environmental disasters combined with poverty and social ills have raised a huge

awareness among governments and businesses around the world (Mathews, 1997). The application of

the CSR concept became widespread across all continents starting in the 90s and even further

acceleration occurred at the beginning of the new millennium after the big corporate scandals such as

Enron and WorldCom, which shook the western world (Bratton, 2002). Nowadays, People are much

more sensitive to the delicate nature of the earth’s ecology than they were in the 60s, while

simultaneously becoming more mindful of human rights (Gillan & Martin, 2002).

Now, whether this is all done genuinely or it is just a new strategic marketing tool that

businesses are using to sell even more products and gain even more customers is to be verified.

Leaders who are truly socially responsible and are engaged in CSR believe in a way to make Earth a

better place to live and run some businesses. By engaging in “voluntary” CSR activities, these leaders

fully recognize that their organizations do not exist for the sole purpose of financial gain but also for

the welfare of the entire society (Cochran, 2007).

Practice of CSR in Malaysia

The Bursa Malaysia CSR framework is a set of guidelines for Malaysian Public Listed Companies

(PLC) to help them in the practice of CSR. In fact, as of 2006, all Malaysian PLCs have been required

to disclose their CSR activities (Bursa Malaysia, 2012). The fundamental aim of the framework is

promote active engagement in CSR. According to Abdul Hamid and Atan (2011), CSR should not be

considered a mere altruistic concept that companies only seek to improve their image, but an inherent

and vital business practice that promotes ethical values, social responsibility, awareness to

environmental problems, social issues and so forth. Bursa Malaysia strongly urges Malaysian PLCs to

adhere to CSR not because they are legally bounded to but because value the importance of CSR

(Rahim, Jalaludin & Tajuddin, 2011). Furthermore, Bursa Malaysia encourages Malaysian PLCs to

take their own initiative to practice CSR-related business (Che Zuriana, Kasumalinda & Rapiah, 2002).

The Bursa Malaysia CSR framework looks at four major areas (Bursa Malaysia, 2012):


The environment: Bursa Malaysia puts a significant weight on the protection of the

environment from which we get our resources.

The community: Businesses depend on the community for both inputs and outputs, the

importance of the relationship they have with the communities they belong to cannot be

overemphasized. Bursa Malaysia encourages Malaysian PLCs to find ways to contribute to the

community as a whole.

The marketplace: The marketplace is where we find the most important stakeholders.

Therefore, it is essential that companies develop strong ties with them by producing green products for

instance or engaging in ethical procurements only.

The workplace: Businesses owe society a lot as they get their highly qualified workforce from

it, thus a good employee treatment is required in return. Basic human rights must be guaranteed.

Problems of CSR Implementation

Baker (2010) highlighted four factors that create irresponsible businesses. Though, profit-seeking

companies have as an ultimate goal of financial gain, however, to what degree are these companies

willing to reach this goal? Will these companies try to achieve their objective at any cost? Even if it is

done through unethical practices? The truth is that many companies pursue this path ignoring some key

points that have the potential of destroying the future of these companies. Past studies have highlighted

few of these (Belkaoui & Karpik, 1989; Deegan & Gordon, 1996; Griffin & Mahon, 1997):

The belief that they are protected from consequences: It is like doing the wrong thing on the

basis that it is difficult to see how they could be caught. Many companies, riding the wave to success

and prosperity at the detriment of the environment and the community, overlooking the potential

consequences of their acts. They continuously think they are immune to external controls and as a

result, their immoral and criminal practice persists.

Building a business model that depends on customer ignorance: Customers do not usually

question the origin of the product or service they purchase, and this is seen as an opportunity for

companies to continue getting involved in irresponsible practices. These companies, just like banks

and insurance companies, benefit from the fact that their customers do not understand the complex

details behind some of the products they buy, given the difficulty of understand the details. Therefore,

there is neither pressure on these companies to explain product and service processes to their

customers and consequently, nor pressure on them to change these processes as long as customers are

satisfied with the final product or service. This, fortunately, has not gone without attracting attention.

In the UK, for instance, the government has embarked on a continuous quest to provide the right tools

to force the companies to clean up.

Becoming so absorbed in the micro-reality of your business so you fail to see the bigger

picture: Some people are locked in a world in which they only see what they want to see; they only

believe in what they want to believe in; a world made up of their values and beliefs. These people

become so immersed in this mindset that they get completely detached from the outside world and thus

reach a level at which they would not tell what is conventionally considered wrong from what is

conventionally considered good.

Believing the reality that it is most comfortable to believe: In order to protect their businesses,

some companies just stick to what is practical and what is doable within their goal-seeking frame. As a

result, they ignore what reality tells them to do.

CSR in Supporting the Community and the Environment

All of these factors lead companies into making decisions with unintended negative consequences

(Clarke & Sweet, 1999). Moreover, over time, intentionally thinking, there is no other choice but to


attach to their current business model; or unintentionally, removed from reality, these companies

continue doing the job they are doing. However, these issues can be effectively addresses with good

leadership combined with a good ethical code put in place (Dowling & Preffer, 1975).

Boehe and Barin-Cruz (2010) suggested a number of theoretical implications for CSR and

international business literature. Firstly, concerning export performance, innovation and CSR product

differentiation are more important predictor variables than quality differentiation. While previous

research has already drawn attention to the importance of innovation for export performance and

internationalization in general, the significant positive effect of CSR differentiation on export

performance constitutes a new finding. Secondly, the effect of a CSR or innovation product

differentiation strategy on export performance seems to be contingent on the market scope: firms that

focus on a small group of developed country markets will be more successful in increasing their export

performance using a CSR or innovation product differentiation strategy than exporters which direct

their exports to a large number of countries or focus on developing economies. Thirdly, an open

question is why some kinds of differentiation strategies (innovation and CSR product differentiation)

have had a positive and significant impact on export performance, while others (quality product

differentiation) had not. A possible explanation is that product quality differentiation may be easier to

imitate than CSR and innovation related differentiation. Fourthly, another open question is why CSR

product differentiation is not significantly related to product quality differentiation or to product

innovation differentiation when exporters predominantly target developed country markets? That CSR

product differentiation may primarily be used when targeting a certain small group of developed

economies where consumers are particularly sensitive to social and environmental issues may be a

possible explanation.

Though speculative, in such specific markets, CSR characteristics might become entry barriers

or minimum requirements for entering the target market: hence, they would cease to be differentiating

product characteristics (Boehe & Barin-Cruz, 2010). A further interesting insight regarding the impact

of different kinds of institutional environments on export strategy is that deteriorating competitiveness

vis-à-vis low cost competitors is likely to favor novel product differentiation (such as CSR) approaches

which go beyond traditional approaches of differentiation by quality, image, and innovation, among

others (Gray, 2000).

Boehe and Barin-Cruz (2010) conclude that institutional environments of both the developing

country exporters’ country of origin and the country of export destination are likely to have an impact

on the adoption of CSR practices. However, in the case studied, both impacts are qualitatively

different: while the country of origin’s institutional environment creates pressures to adopt CSR as a

product differentiation strategy, the destination country’s institutional environment is likely to

influence the nature and content of CSR differentiation.

Conclusion

The problems of underdevelopment, unemployment, poverty, low living standards and

exploitation in many third world countries have lingered for long and still refuse to go away because it

just seems like governments have not put the necessary efforts into eradicating these problems (Rahim

et al., 2011). Therefore, the promotion of social development issues should be taken care of by the

corporate sector mainly or at least in cooperation with the government and other non-governmental

sectors. The corporate sector has a major role to play in CSR. There are a number of decisive issues

that companies must engage in CSR activities, for instance:

1. Now a days, consumers avoiding what they see as socially irresponsible products or the

products of companies that have allegedly not acted in society’s best interest.

2. For people investing their own money, several investment management companies maintain

blacklists of ethically or socially irresponsible companies.


3. Poor social performance will drive away potential investors.

4. CSR activities help to avoid the excessive exploitation of labor, bribery and corruption.

5. Many aspects of CSR behavior are good for business (such as reputation, human resources,

branding and making it easier to locate in new communities) and legislation could help to improve

profitability, growth and sustainability.

6. Companies’ brand image can easily be harmed or even lost; this is particularly true for

companies whose brand image is closely tied to their reputation. Reputation is mostly built around

such intangibles assets as trust, reliability, quality, consistency, credibility, relationships and

transparency. Therefore, if companies are held responsible for any unethical behavior, then they can

lose their reputation in no time.

7. An increasing number of individuals across the globe are also strongly in favor of CSR and

many of them would quit their socially irresponsible companies, thereof, CSR is an important factor

for employee motivation.

8. Innovation, creativity, intellectual capital and learning are helped by a positive CSR strategy,

thus, its preservation through the positive treatment of the workforce is necessary.

In spite of a number of drawbacks inherent to CSR activities such as rising costs for observance

and operation, additional bureaucracy, and the difficulty to monitor companies’ CSR activities, CSR

should not be viewed as a drain on resources, because carefully implemented CSR policies can truly

help organizations develop very positive aspects that would outnumber the negative ones. Successful

CSR is sustainable, involving activities that organizations can maintain without adversely affecting

their business goals. CSR is a long-term approach to business that addresses the needs of communities,

people and their employers. CSR provides frameworks for successful enterprise that is harmonious

with its surroundings. CSR is an opportunity to generate honest, authentic good-news stories that a

business and its community can be proud of.

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