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ICFAI University MBA-Management of Banking Companies previous years question papers

1. Which kind of ‘leadership style’ is required to be adopted when the leader is required to possesses the qualities
of vision, motivating of people, and framing tasks for his subordinates
(a) Coercive style
(b) Authoritative style
(c) Affiliative style
(d) Democratic style
(e) Pace setting style.

2. Which of the following statements is relevant to ‘change management risk’?
(a) It is the risk of financial loss arising from the business failure to deliver as per expectations
(b) It is the risk of direct loss resulting from inadequate or failed technology
(c) This risk is the possibility of loss if a borrower fails to meet his financial obligations
(d) It is the risk that arises due to inappropriate human resource policies
(e) It is the risk that arises due to wrong organizational structure.

3. Which of the following statements is incorrect with respect to ‘Quality Survey’?
(a) Surveys are usually administered through questionnaires
(b) Dissatisfied and unhappy customers do not respond to surveys
(c) Survey can also be informal
(d) The success of the survey depends on it’s design
(e) The results of quality survey can be positive or negative.

4. The entire ‘supervisory mechanism’ has been modified after 1994 under the directions of
(a) Reserve Bank of India (RBI)
(b) Ministry of Finance, Government Of India (GOI)
(c) Board for Financial Supervision (BFS)
(d) State Bank of India (SBI)
(e) Regulations Review Authority (RRA).

5. A typical ‘balanced scorecard’ can be viewed from different perspectives. Which one of the following is relevant
to ‘customer perspective’?
(a) Technology leadership
(b) Employee motivation
(c) Knowledge management
(d) Providing on time delivery
(e) Innovation and Learning.

6. Which of the following ratios measures the operational efficiency of banks?
(a) Return on assets
(b) Return on equity
(c) Business per employee
(d) Profit per employee
(e) Non performing assets to advances.

i. e x e
Page 2 of 23
7. “The form of corporate governance in India is similar to East Asian ‘insider model’ where in the dominance of
promoters in governance is very much prominent.” Which of the following committees/groups held this view?
(a) Dr. R.H. Patil’s advisory group
(b) SEBI committee headed by Sri K.M. Birla
(c) Dr. A.S. Ganguly’ group
(d) Mr. Narayana Murthy’s committee of SEBI
(e) Sir Arian Cadbury committee.

8. Which of the following is a ‘Transaction risk’?
(a) Credit risk
(b) Liquidity risk
(c) Foreign exchange risk
(d) Risk of loss due to technical failure to execute or settle a transaction
(e) Risk of loss due to adverse changes in the cash flows of transactions.

9. The role of the stakeholders in the banking system was not an issue of concern in the past. Which of the
following feature(s) has/have typified the functioning of banking system at present?
I. Customers are more demanding and dynamic; government trading off its social responsibilities against
propagation of international best practices and ensuring efficiency.
II. Assured business level typical to an oligopolistic market condition.
III. Accountability only to government.
IV. Vast network of the branches.
(a) Only (I) above
(b) Both (II) and (III) above
(c) Both (III) and (IV) above
(d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.

10.Which of the following ‘leadership qualities’ gives the leader working knowledge of and an insight into the
operations carried out under his guidance?
(a) Teaching ability
(b) Communication Skills
(c) Objectivity
(d) Emotional stability
(e) Technical competence.

11.Which of the following statements relating to ‘Total Quality Management (TQM)’ is correct?
(a) Companies that are busy warding off competition do not neglect or postpone TQM decisions
(b) TQM can be achieved through employee training alone
(c) TQM can be achieved by simply having as many quality circles as possible
(d) Many firms have not adopted elements of TQM in parts or in isolation
(e) There is a tendency to simply copy TQM as a tool for achieving excellence without providing for
necessary organizational preparedness.

12.Which role among the following is the ‘interpersonal’ role performed by a manager?
(a) Monitor role
(b) Disseminator role
(c) Spokesman role
(d) Leader role
(e) Entrepreneurial role.

13.Which of the following statements is incorrect with regard to ‘lack of differentiation or low switching costs’?
(a) Banking industry has many players and though customer loyalty exists for few firms, of late the
customers are migrating on price terms
(b) The effect of switching costs is identical to what is described for differentiated products
(c) The lower the buyer’s switching costs, the easier it is for competitors to attract buyers
(d) High switching costs insulate the firm from the rivals’ efforts to attract customers
(e) There is vast scope for product differentiation for banking products.

Page 3 of 23
14.Which of the following statements is not correct with regard to ‘Sales Force Automation (SFA)’?
(a) Sales Force Automation (SFA) is an information system that enables companies to acquire and retain
customers
(b) SFA increases the speed of managing or selling the accounts
(c) SFA helps the salespersons to redesign their activities to enable them to provide better services to
customers
(d) If there is a large network of agents, bankers can adopt SFA to minimize the activities involved in selling
banking products
(e) SFA has different fundamental features depending on the vendor who supplies it.

15.Which ‘leadership theory’ states that employees (who are virtually wedded to the bank) who develop a sense of
ownership and commitment to the organization in which they work will be more dedicated to the goals of the
organization?
(a) Theory X
(b) Theory Y
(c) Theory Z
(d) The Michigan studies
(e) The Ohio state studies.

16.Which of the following ‘leadership qualities’ is to be adopted by a banker particularly while dealing with
difficult customers who may be either demanding too much or become loan defaulters?
(a) Objectivity
(b) Empathy
(c) Courageous outlook
(d) Inspirational ability
(e) Emotional stability.

17.When a new organization is formed, its structure is organic and informal. If the organization is successful, its
growth and maturity leads to ____
I. Formalization.
II. Specialization.
III. Standardization.
IV. Complexity and a more mechanistic structure.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) Both (I) and (III) above
(d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.

18.Which of the following statements relating to ‘strategic analysis and choice’ is not correct?
(a) New banks and weak banks that need to comply with prudential norms do not face uncertainty and risk
(b) All the banks in general must develop strategies to cope with uncertainty and risk
(c) The structure of an emerging bank is normally unsettled and keeps changing
(d) The forces of competition also add to the level of uncertainties
(e) A strategy is selected after a thorough comparative study of all the proposed strategies in terms of their
strengths, weaknesses, risks and trade-offs against one another.

19.Which role among the following is the ‘informational’ role performed by a Manager?
(a) Entrepreneurial role
(b) Disturbance handler
(c) Resource allocator role
(d) Leader role
(e) Monitor role.

Page 4 of 23
20.A bank might not be able to fund assets or meet obligations at a reasonable price if it faces
(a) Change management risk
(b) Operational risk
(c) Liquidity and Funding risk
(d) Poor governance risk
(e) Credit risk.

21.‘Transformational Leadership’ theory is categorized under
(a) The “Great Man” (Personality ) theory
(b) The Trait theories
(c) New Leadership Theories
(d) The Behavioral Theories
(e) The Situational Theories.

22.Identify the incorrect statement with respect to ‘Total Quality Management (TQM)’.
(a) ‘Q’ represents product orientation
(b) TQM is a management technique that aims to improve the quality of service provided by an organization
(c) There is difference between Quality and Total Quality
(d) Total Quality is not merely about product quality
(e) Total Quality is performance superiority in delighting customers.

23.Which one of the following is the first phase of development of ‘Executive Dashboard’?
(a) Testing
(b) Implementing
(c) Running
(d) Designing
(e) Recalibrating.

24.Which group/committee was appointed by Reserve Bank of India (RBI) with the task of reviewing the
supervisory role of Boards of both banks and financial institutions?
(a) Dr. R.H. Patil
(b) Dr. A.S. Ganguly
(c) Mr. K.M. Birla
(d) Mr. Narayana Murthy
(e) Sir Arian Cadbury.

25.Which of the following is the last step in ‘Succession Planning’?
(a) Minimizing the Bank’s risk
(b) Co- developing the Leader’s exit strategy
(c) Building a solid Association foundation
(d) Transitioning the Leadership
(e) Strengthening systems and processes.

26.Which of the following statements is correct with respect to ‘Innovations’ in banking?
(a) Successful banking is impossible without investing in a big way in branch computerization
(b) Process and systems innovations include ATM, SWIFT, V SAT, e-commerce etc.
(c) Technological innovations include credit syndication, securitization, factoring etc.
(d) Public Sector Banks (PSBs) are not facing stiff competition from private and foreign banks
(e) Product innovations include Asset-Liability Management, risk management systems, treasury
management etc.

Page 5 of 23
27.Which are the major forces that exert pressure on the organization itself for a change?
I. Political and Social events.
II. Increase in the size, complexity and specialization of organizations.
III. The tendency for large organizations and markets to become increasingly global.
IV. Technological revolution.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) (I), (II) and (III) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.

28.Which of the following statements is not correct relating to high fixed costs/ storage costs?
(a) When fixed costs form a large part in total costs, companies try to minimize the use of their productive
capacity
(b) When many firms attempt to maximize their productive capacity, excess capacity is created on an
industry- wide basis
(c) To reduce inventories, individual companies typically cut the price of their product and offer discounts to
customers
(d) The pattern of excess capacity at the industry level followed by intense rivalry at the firm level is
observed frequently in industries with high storage costs
(e) As the inventories of perishable products grow, producers of perishable goods often use pricing
strategies to sell products quickly.

29.The Bank for International Settlements (BIS) has proposed worldwide capital requirements for banks related to
credit, market and operational risk. However, determining the extent to which the new accord will be adopted is
left to
(a) Central Bank of a country
(b) World Bank
(c) Central Govt., of a country
(d) Asian Development Bank
(e) European Central Bank (ECB).

30.Which was the first Presidency Bank established in 1806 in India?
(a) Bank of Bombay
(b) Bank of Madras
(c) Bank of Calcutta
(d) Bank of Hindustan
(e) General Bank.

END OF SECTION A
Management of Banking Companies (MB3H2B): January 2009
Section B : Caselets (50 Marks)
• This section consists of questions with serial number 1 – 8.
• Answer all questions.
• Marks are indicated against each question.
• Detailed explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.
Caselet 1
Read the caselet carefully and answer the following questions:
1. Discuss the changes that have taken place in the Indian Banking Sector from the
1950s till date and the innovative response of the Indian Banking System/
Government during the said period. ( 8 marks)

Page 6 of 23
2. List out the Technological, Process& Systems and Product Innovations in the Indian
Banking Sector. ( 6 marks)

The banking system in India has created a niche for itself in the current competitive
global arena where adoption of new and innovative technological developments
carries the key to expansion of business and its future development. The Indian
banking system has come a long way from being a player restricted to domestic
boundaries to a leading giant in the world of financial services across the globe.
Credit for this progress goes to a mix of factors like, the introduction of various
economic reforms which gave a boost to the banking sector, adoption of new
technology by banks in order to streamline their line of businesses and increasing
profits by improving cost efficiency and offering doorstep banking convenience to
their customers.
Banking ‘Then’ and ‘Now’
Indian villages were deprived of various financial products like mutual funds,
insurance and equity trading hitherto, which are now accessible through proxy
banking in the form of Internet kiosks and ATMs. The alias given to banking which
is not routed through branches is 'Channel Migration'. Through this route, a bouquet
of services is at the customers' disposal in today's banking system.
This is possible because banking transactions are stored in a centrally located server
with which all other branches of a bank are connected. The technological systems in
India are considered far more advanced than those of Russian and Chinese banking
systems but are lagging far behind the UK, USA and Singapore.
Connectivity takes root
Today almost all scheduled commercial banks are connected to all the branches on a
real time basis extending the anywhere banking facility to the customers, which
means that it is not necessary for a customer now to visit the branch personally in
order to conduct transactions. Now a customer has various other options available
with him like internet banking, mobile banking, ATMs (automated teller machines),
phone banking which offers 24 X 7 banking, etc. Whenever and wherever a
transaction is done in a bank account, the updated status is reflected in all the
branches, thus making anywhere banking possible. ATMs have revolutionalized the
banking sector by making cash and other banking services available to customers at
all times.
Future Outlook
The future of Indian banking lies in increased investment in technology plat forms
and a greater focus on end-to-end solutions provided by IT majors like core banking
products, vertical specific CRM and risk management software.
END OF
CASELET 1
Caselet 2
Read the caselet carefully and answer the following questions:
3. Explain the ‘Banker’s Role’ and the role of ‘Competitive Environment’ in a
Customer Life Cycle (CLC).
( 5 marks)

4. What do you understand by ‘Sales Force Automation’? What purposes does it serve?
( 5 marks)

The Channel Evolution
The technology in banking is leading to a further evolution in relationship
management. Internet helps in the reduction of transaction costs and lessens face-toface
interactions. Customer finds it more convenient to carry out transaction through
the Internet. There is more technology interface. The relationship manager must
possess the knowledge about the channels that his customers use and for which
transactions. He has to help them to understand and use technology effectively in
this wired world. Educating the customer must be a focal point.
Page 7 of 23
The Financial Advisor
The product array for customers is ever-growing. The relationship manager of the
future will have to don the role of a financial guide for his customers. Therefore, his
strength and relationship will be based on knowledge. This will lead to customers
seeking out their financial guide, their financial planner the new challenge for winning
strategies in financial services. Continue to question how close your customers
would like you to be.
Stumbling Blocks
Way back in 1999, the Gartner Group cautioned saying, "more than 60% of all CRM
initiatives fail." In reality, current CRM programs are complicated with conflicting
goals, advice and technology choices that impair banks' ability to adopt a successful
CRM approach. Visions of CRM offered by vendors, analysts and experts often fail
to offer pragmatic steps in achieving success. The technology infrastructure and
capabilities required to share and exploit customer information effectively across
corporate boundaries do not yet exist in many banks.
Bringing about the cultural, processes and organizational changes required to
execute CRM successfully continues to be a major challenge for most banks.
Future Outlook
It is clear that for surviving and competing in business, retention of customers is a
critical factor because the cost of keeping them is less than replacing them. Selling
of products or services to them efficiently creates loyalty and, this, in turn, creates
more business. But as resources are stretched to new limits, the costs to attract and
retain customers will continue to rise and banks will be forced to rethink how they
can leverage the investments in CRM capabilities and infrastructure. As
technological advances continue, many more applications are expected to emerge.
New capabilities are required to capture, store and analyze greater amount of data.
And if they make this a part of their future CRM strategies, they will be better positioned
to keep pace with their customers' demands and competitors and to grow
profitability in the future.
Banks need to be careful when they spend CRM budget on smart, fast and focused
initiatives that will satisfy more customers, more of the time. It is a real opportunity
to create tailored customer experiences and as a result, competitive differentiation
and long-term growth. Leaders are taking careful steps and beginning to identify the
varying needs of customers, manage the entire experience, and drive increased
loyalty. Others simply can't afford to wait. Once a few players establish significantly
differentiated experiences, they will be extremely difficult to catch up with.
END OF
CASELET 2
Caselet 3
Read the caselet carefully and answer the following questions:
5. Describe the Features of Knowledge Management.
( 5 marks)

6. Give an account of ‘Systematic Approach to Knowledge Management’.
( 5 marks)

Many refuse to draw the distinction between information and Knowledge.
Knowledge Management (KM) expert argue that “If knowledge is not something
that is different from data or information, then there is nothing new or interesting in
Knowledge Management” Information is available in plenty in books, on websites,
in manuals and even in people, whereas knowledge is not. Knowledge is an
astounding blend of judgement, insight and inspiration and entails lifelong learning.
Through information, people get to know ‘what’ while knowledge tells them ‘how’
and ‘why’.
Thus, the distinction between information and knowledge emphasizes a
fundamentally different approach to working with knowledge in today’s
organizations. Knowledge has emerged as a new resource contributing to sustainable
competitive advantage. Knowledge Management Systems (KMSs) are guided to
Page 8 of 23
capture, create, store, organize and disseminate organizational knowledge. It is
indisputable that the performance in the capture, creation, codification and allotment
of knowledge depends on the implementation of technological platforms capable of
supporting an integrated management and thus to reach the stake holder’s
information needs. Being stored and developed through four essential discrete
repositories – people, processes, systems and culture – a functional Knowledge
Management System (KMS) should be clearly understood inside the organization for
the entire optimized combination of these repositories.
The organization engaged in knowledge sector is looking forward to attain
competitive advantage in this fast growing world. The software companies and other
knowledge based ones are looking for knowledge to be transferred from one
generation to another, to sustain advantages over others. With in a shorter time and
cost, the organizations aim to capture and share information among it’s employees.
The search for the source of knowledge at enterprise or employee level, improves
business and productivity. The Knowledge Transfer (KT) can be done and captured
from individual, group and enterprises levels in the form of knowledge bank which
helps the organization to develop and achieve strategies and objectives. This
captured knowledge can be transferred at each functional level to the newly recruited
employee. The different KT methods like induction method, counseling method,
employee rotation method, training and development method, group learning
method equip the organization to transfer knowledge and can be stored and reused at
different levels of problem solving in an organization.
END OF
CASELET 3
Caselet 4
Read the caselet carefully and answer the following questions:
7. Describe the areas that could pose a challenge to the implementation of Corporate
Governance.
( 8 marks)

8. Explain the role of Reserve Bank of India (RBI) in Corporate Governance and
elucidate the need of corporate Governance in banking sector.
( 8 marks)

The role of the Central Bank or the Reserve Bank of India (RBI) is to maintain
financial stability in the system, so that each player can discharge its role effectively.
By the very nature of the activities being undertaken by the RBI like overseeing
payment and settlement system, making of monetary policy, carrying out
supervisory role, etc., which becomes, all the more important that a conducive
environment for a stable financial system is needed. For ensuring stability in the
system, proper policy on governance is required.
The crises and problems in any institution can be attributed to the fundamental
weakness in corporate governance's practices such as excessive risk taking,
inadequate management of the risk, poor laid down policies, transparency in disclosures,
etc.
Corporate Governance encompasses the set of relationships among the corporate
entity's management, board of directors, shareholders and other stakeholders. It
provides the fundamental structure through which the objectives of an entity are set
and the means of attaining those objectives and monitoring performance are
determined. Corporate Governance is relevant not only to an individual institution
but also to public and private entities dealing with it, as well as supervisory
authorities, central banks and governments. Sound governance generates positive
externalities and provides the basis for a strong and stable financial system.
The issues in corporate governance crop up from an identifiable process. It all
started with the scandals that broke out during 1980s involving the UK listed
companies and concerns emanating thereof. The committees such as the Cadbury
committee report (December 1992), Greenbury committee report (1995), Hampel
committee report (1998), Turnbull committee report (September 1999), and Paul
Myness (2001) to name a few have examined various aspects of corporate
governance. They have stressed on the need for a good corporate governance in
Page 9 of 23
place, and the need for good policies are well-articulated by them. The basic arm of
all these committees was to provide guidance and help the listed companies to
implement the internal control mechanism in corporate governance and improve
their practices in the UKs listed companies.
To begin with the Cadbury committee report, it has echoed to quote “Committee's
recommendation is a code of best practices, which will go long way to achieve a
high standard of corporate behavior.” The emphasis, on board, as a focal decision
point, could be said to be led by Cadbury, as could be the emphasis on appropriately
constituted board sub committee independent non-executive director and separation
of chairman and chief executive position. Subsequently, due to the winding up of
large US firms such as Enron Corporation and Worldcom, there has been a renewed
interest in the practice of corporate governance in modern corporations since 2001.
In view of such failures and intending to restore public confidence in corporate
governance, the US federal government in 2002 passed the Sarbanes Oxley Act
(SOX), which is better known as Public Accounting Reforms and Investors
Protection Act of 2002, Which protects the investors. This act covers the issues such
as auditors' independence, internal control assessment and financial disclosures,
corporate tax return accountability issues, etc.
Turning to the Indian experiences, the Confederation of Indian Industries (CII), the
Associated Chambers of Commerce and Industry (ASSOCHAM) and Securities and
Exchange Board of India (SEBI) realized its importance. They reinforced the
Cadbury report and stressed on the crucial role of the board of directors, and
reiterated the need of it, to observe the code of best practices. Further, at the instance
of SEBI, Kumar Mangalam Birla committee has come out with a set of
recommendations. At the heart of the Committee's report is the set of
recommendations which distinguish the responsibilities and obligations of the
boards and the management in instituting the systems-for good corporate governance
and emphasizes the rights of shareholders in demanding corporate governance.
Some of the recommendations include caliber of nonexecutive directors on the
boards who can help bring independent judgment to bear on boards deliberations.
This goes to say that corporate governance is now a way of life, on how different
entities behave in a system and how most of the forward looking organizations look
at the concept of corporate governance.
The RBI has asked all the listed commercial banks to follow SEBI committee report
on corporate governance. Further, these reports can be used as a catalyst for performance
improvement in the public and non-profit sectors as well. Thus, looking at
definition level, the corporate governance provides the set of processes, customs,
policies, laws and institutions affecting the way a corporation is directed,
administered or controlled. It also includes the relationships among the players
involved (the stakeholders) and the goals for which the corporation is governed. An
important theme of corporate governance is to ensure the accountability of certain
individuals in an organization through mechanisms that try to reduce or eliminate the
principal, agent problem.
END OF
CASELET 4
END OF SECTION B
Section C : Applied Theory (20 Marks)
• This section consists of questions with serial number 9-11.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 - 30 minutes on Section C.
9. Explain the Coercive, Authoritative, Affiliative, Democratic, Pace-setting and
Coaching styles of Leadership.
( 7 marks)

Page 10 of 23
10. Elucidate ‘Risk Based Supervision (RBS)’. List out its advantages.
( 7 marks)

11. Write Short notes on:
a. Recommended Guidelines for Information Gathering.
( 3 marks)
b. Operational Risk.
( 3 marks)
END OF SECTION C
END OF QUESTION PAPER
Page 11 of 23
Suggested Answers
Management of Banking Companies (MB3H2B): January 2009
Section A : Basic Concepts
Answer Reason
1. B Right option is (b). The authoritative leader is a visionary who motivates people by
making clear to them how their work fits into the larger vision of the organization. He
frames tasks for his subordinates and gives both negative and positive feedback to his
subordinates.

2. A Right option is (a) as Change Management Risk is the risk of financial loss or
reputational damage arising from the business failing to deliver as per expectations.
Option (b) is relevant to operational risk, Option (c) to Credit risk, and options (d) and
(e) to Poor governance risk.

3. B It is observed that customers who are happy with the bank’s service usually do not
respond to surveys but the dissatisfied and unhappy customers usually do. Therefore,
it is more important to address the negative comments revealed by the surveys and
identify the problems. Banks need to build bridges in their relationships especially
with dissatisfied customers. All other options are correct statements relating to
Quality survey.

4. C Right option is (c) as after 1994, the entire supervisory mechanism has been modified
under the directions of BFS.

5. D Right option is (d) as it is the only option relevant to customer perspective. All other
options are relevant to Learning and Growth perspective.

6. A Right option is (a) as it is the only ratio that measures the operational efficiency.
Options (b), (c), and (d) are productivity ratios while option (e) is a business ratio.

7. A Right option is (a). Dr.R.H. Patil’s advisory group on corporate governance for the
RBI standing committee on International Financial Standards and Codes held the
view that the form of corporate governance in India is similar to the East Asian’
insider’ model, wherein the dominance of promoters in governance is very much
prominent.

8. A Right option is (a). Options (b) and (c) are balance sheet risks & (d) and (e) are
operating and liquidity risks.

9. A Right option is (a) as statements (II) and (III) and (iv) are a thing of the past and
relegated to history. Item (I) is a current phenomenon where an increase in the level of
competition and market mechanism led to draw lines of distinction between leaders
and laggards. Core principles based on acceptable global benchmarks have been
adopted to safeguard against the crisis. Customers are more dynamic and demanding
with high propensity to switch service providers. Govt., still as a majority stake
holder, has been striving hard to trade off it’s social responsibilities against
propagation of international best practices and ensuring efficiency. The managements
in banks are also putting an extra yard to counter the diseconomies of size, make good
the inadequacies in IT application and stay afloat in the fiercely competitive market
place. All these and frequent cases of regulatory rigors have left the banks at the cross
roads.

10. E Right option is (e). For example, in matters relating to credit appraisal or maintenance
of computer systems, the concerned supervisor must possess the technical
competence for taking a decision. Otherwise, it could lead to failure.

11. E Right option is (e) and all other statements relating to pitfalls in TQM implementation
are wrong because:
(a) Companies that are busy warding off competition, often neglect or postpone TQM
decisions; (b) & (c) A mistaken belief is that TQM can be achieved through employee
training alone or by simply having as many quality circles as possible; (d) Many firms
have adopted elements of TQM in parts or in isolation.

Page 12 of 23
12. D Right option is (d) as Leader role is the interpersonal role performed by a manager
whereas, (a), (b),(c)are informational roles and (e) is a decisional role. As a leader,
manager has to coordinate the work of others and lead his subordinates.

13. E Right option is (e) as there is little scope for product differentiation for banking
products. The only exception would be customized products.

14. E Right option is (e) as SFA has the same fundamental features regardless of the
vendors who supply it.

15. C Right option is(c).Theory Z states that employees who develop a sense of ownership
and commitment to the organization in which they work will be more dedicated to the
goals of the organization and thus will become more productive. Employees who
are virtually wedded to the bank comprise of such category of staff.

16. E Right option is (e)Emotional stability refers to leader’s ability to deal with
subordinates or followers in a confident, calm and empathetic manner .Business
matters can create tension and ill-will. Bankers have to maintain poise particularly
while dealing with difficult customers who may be demanding too much or who may
be a loan- defaulter.

17. E When a new organization or sub unit is formed, its structure is organic and informal.
If the organization or sub unit is successful, it grows and matures. Maturity leads to
formalization, specialization, standardization, complexity and a more mechanistic
structure. Hence right option is (e).

18. A. Right option is (a). New banks and weak banks that need to comply with prudential
norms face uncertainty and risk.

19. E Right option is (e) as Managers have net work of contacts and get information by
scanning the environment, subordinates, peers and superiors. Managers play the role
of monitor by colleting information. Options ( a), ( b), ( c) are Decisional roles and (
d) is interpersonal role.

20. C Right option is (c) as a bank might not be able to fund assets or meet obligations at a
reasonable price in respect of liquidity and funding risk.

21. C Right option is (c) as both Super Leadership and Transformational Leadership are
categorized under New Leadership Theories being developed.

22. A Right option is (a) as “Q” represents Total Quality. It denotes a commitment to Total
Quality, not just products. Quality, when represented by ‘q’ is a symbol of firm’s
approach to quality that only emphasizes on it’s products. This is also referred to as
product- orientation.

23. D Right option is (d). Designing is the first phase and begins with a thorough analysis of
the strategies, goals, and information sources of an organization. Designing is
followed by Implementing, Testing, Running and Recalibrating which are the other 4
phases in the development of executive dashboard.

24. B Right option is (b).The RBI constituted a consultative group of directors of banks and
financial institutions under the chairmanship of Dr. A.S. Ganguly. This group was
given the task of reviewing the supervisory role of Boards of both Banks and other
financial institutions. In the Indian context, Ganguly committee recommendations can
be benchmarked with international best practices as per basal norms. The RBI has
also ensured that most recommendations are implemented. As an indication of the
follow up measures taken in this regard, the RBI issued a circular dated 25-6-2004 on
‘fit and proper’ criteria for directors of banks.

25. D Right option is (d) as this step identifies the gaps between the required leadership and
the existing talent pool.

26. A Right option is (a) and all other statements ( b), ( c), ( d) &( e) are incorrect.
27. E There are various factors that cause changes in the organization. The fact that either
something relevant to the organization has changed or is going to change puts
pressure on the organization itself to change. The 4 major forces of change are
indicated vide statements (I), (II), (III) and (IV) and hence right option is (e).

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28. A Right option is (a).When fixed costs form a large part in total costs, companies try to
maximize the use of their productive capacity. All other options are correct with
reference to high fixed/ storage costs.

29. A Right option is (a). The Bank of International settlements – under the new basel
capital Accord has proposed worldwide capital requirements for banks related to
credit, market and operational risk. However, it is up to each country’s central bank to
determine the extent to which the new accord will be adopted.

30. C The first presidency bank was established in Calcutta in 1806 under the name of Bank
of Calcutta. Other 2 presidency banks were the Bank of Bombay and the Bank of
Madras, established in 1840 and 1843 respectively. They were private shareholders’
banks, although the East India company also contributed to their share capital. Hence,
right option is (c).

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Management of Banking Companies (MB3H2B): January 2009
Section B : Caselets
1. Early Innovations
Initially, we take a look at the changes that have taken place in the Indian banking sector since
the later half of the twentieth century. Such changes reflect the crucial role played by the
banking sector in the economic development of country. As we study about these changes, we
can also understand the innovative response of the Indian banking system/government during
that relevant time-period.
The changes can be described under four phases as given below:
The Foundation Phase
This phase refers to the period from the 1950s till the first round of nationalization of banks in
1969. The priority during this phase was to lay the foundation for a sound banking system.
The private banks operated with earning profits as the main motto. These banks were run on
purely commercial lines and to a major extent, the aspirations of the common people were
disregarded. The security aspect was considered very important and the tendency of these
banks was to cater to the financial needs of the elite group/big business houses.
At the same time, the main emphasis of the planners was on the development of the primary
sector, i.e., agriculture. However, the bankers were only interested in the development of big
industrial and trading houses. As a result, the financial needs of the agriculturists could not be
met. During this period a major development took place by way of the transformation of
Imperial Bank of India into State Bank of India and the consequent redefinition of its role in
the Indian economy.
The Expansion Phase
This phase refers to the period from nationalization in 1969 till 1984. The banking industry
made a determined effort to reach to the masses. As a part of this exercise, the then Prime
Minister, Mrs. Indira Gandhi nationalized 14 commercial banks in 1969 and another 6 banks
in 1980. The emphasis was on branch expansion to cater to the financial and banking needs of
the masses. The concept of priority sector evolved during this phase.
This sector comprised small scale industries, small business, agriculture and foreign trade. The
banks adopted a need-based approach to assist entrepreneurs in setting up small scale/cottage
industries which are labor intensive and also provide employment opportunities to the masses.
The nationalized banks also witnessed a large-scale branch expansion during this period.
Effectively, the size of population serviced by each branch was reduced. The problems
however were that with the uneven branch expansion, the banks became unmanageable, led to
the deterioration of customer service, increase in bad and doubtful debts and shrinkage in the
spreads and consequent reduction in profitability of the nationalized banks.
The government implemented measures like providing subsidies to the priority sector. On the
negative side, many businessmen/industrialists in the garb of entrepreneurs launched their
efforts to avail the different facilities offered by the government through banks. They obtained
cheaper credits from the banks and financial institutions. However, the growth in industries
failed to rise to expectations. Thus, this era also suffered from many cases of sick industries.
Consolidation Phase
The consolidation phase refers to the period from 1984 till May/June, 1991. Undoubtedly the
rapid and uneven branch expansion, provided a wide geographical coverage. At the same time,
the banks' lines of supervision and control were stretched beyond the optimum level.
A major step taken during this period was the rationalization of the rates of interest on
deposits and advances. The concept of disintermediation also emerged as the public was flush
with funds. The corporate sector also tapped huge amount of funds directly from the capital
market and through various money market instruments.
The burden of bad debts had to be tackled by the government. Various measures were taken to
tackle this problem. Efforts were made by the government to help those who were unable to
run their ventures effectively due to paucity of funds. Thus, institutions like BIFR and the
SICA enactment came into effect.
This phase was marked by a slowdown in the branch expansion. Banks paid a lot of attention
towards improving the much deteriorating aspects in the areas of house-keeping, customer
service, credit management, staff productivity and profitability. Further steps were taken to
rationalize the interest rate structure on bank deposits and loans. More importantly, measures

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were initiated to reduce the structural constraints, which obstructed the growth of money
market.
The Reform Phase
This phase began from June 1991 with the launching of economic reforms, which aimed
towards a more open and more competitive market economy. To achieve this objective within
the framework of democratic polity is a historical initiative, not only in the economic history
of India, but of the entire developing world.
The economic reforms launched in India were under the compulsions of the grave economic
crisis faced by the country at that time. These reforms had to be designed and implemented in
tandem with the conditionalities agreed with the International Monetary Fund (IMF) under a
Standby Loan Facility of 18 months duration (ending March 1993) in support of India's
balance of payments needs at that time.
2. Technological Innovations
To face the competition, there is an imperative need for the banks to depend heavily on the
technological innovations. Ever since the Rangarajan Committee, submitted its
recommendations, the banks have been striving hard to implement total-computerization. As a
result, today successful banking is almost impossible without investing in a big way in branch
computerization. PSBs in particular are facing stiff competition from the private and foreign
banks in this regard.
Significant achievements made in the recent past in the area of technological innovations with
regard to their applicability in the banking sector are listed below:
a. Full Branch Computerization,
b. Automatic Teller Machine (ATM)
c. Wireless Application Protocol (WAP)
d. Convergence
e. Internet
f. LAN, E-mail and Website
g. SWIFT
h. VSAT
i. Electronic Commerce (e-Commerce)
j. DOTCOM
k. Enterprise Resource Planning (ERP)
l. Data Warehousing and Data Mining.
Process and Systems Innovations
In order to cope with the systems integrity in the process of banking some, innovations have
been made in the recent past. A few of such innovations are listed below:
a. Treasury Management
b. Asset-Liability Management
c. Risk Management Systems in Banks.
The types of risks faced by banks are depicted in the following table:
Product Innovations
The various product innovations that have taken place are listed below:
a. Credit syndication
b. Securitization
c. Credit derivatives
d. Factoring
e. Commercial paper
f. Interest rate swaps
g. Currency swaps
h. Currency options
i. Currency futures
j. Gold banking

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k. Credit cards.
3. The Banker's Role
The banking organization undertakes different activities in a CLC. They are:
• Intrude and engage: The banker attempts to get the prospect's attention and makes him
aware of the bank's products/services. The prospect is kept engaged in a conversation that
prompts him or her to know more regarding the CLC. Information is provided to the
prospective customer/s through pamphlets; advertisements etc.
Acquire: A prospect that is aware of a banker may not necessarily purchase that banker's
product or service. The banker must educate the prospect about its products/services to
acquire him as a customer. The art of selling is tested as the banker seeks to explain the
relevance and importance of a product to the customer. For instance, in a home loan the
provision for Income-tax rebate could serve as a strong point for the banker.
Retain and expand: A banker's real work begins only after the prospect buys its products or
services and becomes an actual customer. In this stage, the banker develops several business
strategies to increase customer satisfaction and foster customer loyalty. After the prospective
customer turns out to become the bank's customer, the bank seeks to expand its services. For
instance, the customer may be given the benefit of a credit/debit card at no cost.
To develop, a well-defined CLC, bankers need to map their business processes clearly to the
customer needs. The interaction between the banker and the customer depends on the
competitive environment. Bankers must prevent their customers from being lured away by
their competitors.
Competitive Environment
The whole process of CLC depends on the competitive environment. The severity of
competition faced by the banker largely determines whether the prospect can become a
customer or not. The prospect can drop out of the CLC in two ways. Firstly, the competitor
may capture the prospect before the 'customer moment.' This is known as a “loss” and is not
preferred by the bankers. Secondly, there may be erosion in customer loyalty though the
prospect may be an actual customer. This erosion in customer loyalty may occur when the
customer is dissatisfied with the products/services offered by the organization or when the
competitor's products/services are superior. This is known as “attrition.”
The inability of a banker to offer acceptable services results in the loss of valuable customers.
The banker will have to make more efforts to win back customers.
Bankers may have a tough time with customers who voice their dissatisfaction openly, as they
may dissuade other customers from doing business with the banker. As a result, other
prospects may enter the competitor's CLC.

4. SALES FORCE AUTOMATION
Sales Force Automation (SFA) is an information system that enables companies to acquire and
retain customers. It increases the speed of managing or selling accounts, and helps the
salespersons to redesign their activities to enable them to provide better services to customers.
Staff members, agents and brokers sell bank's products and act as salespersons for the banker.
If there is a large network of agents, bankers can adopt SFA to minimize the activities
involved in selling banking products or services to the customers. SFA serves the following
purposes:
• Increased revenue: It increases revenues as it reduces the costs involved in
administrative as well as sales activities.
Reduced cost of sales: The successful implementation of SFA largely depends on the
reduction in cost of sales. Field level staff spend more time in making continuous and
repetitive data entry. Sometimes, they make unsuccessful attempts to extract and
interpret data without having the required tools. The cost of sales is reduced when the time
spent on administrative and other non-sales-related efforts is reduced.
Increased mobility for the sales force: The field staff requires increased mobility as they are
usually out of the office to meet customers and prospects. Their mobility can be increased

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by using Personal Digital Assistance (PDA), wireless applications, and converging the web
and phone, thereby reducing the frequency of their visits to the headquarters to report their
everyday activities. The more customers the salespersons can meet, the more advantageous it
is for the organization. As mobility has become an important aspect for gaining a competitive
edge,, organizations provide mobile tools such as hand-held sets with Internet connectivity, to
their field staff.
Easily available customer with a single view: Bankers have various departments such as the
deposits department, the credit department and the accounts department, and so on. The credit
department may wish to see the status of the account with regard to the end-usage of the funds
lent by the bank, while the accounts department may be interested in seeing the status of the
bills that are being negotiated. The staff may be interested in managing the customer accounts.
SFA enables each department to view the data individually and simultaneously without any
interruption.
5. Features
Knowledge Management (KM) is defined as the systematic management and use of the
knowledge in an organization. In other words it is "the leveraging of collective wisdom to
increase responsiveness and innovation." Management discipline promotes a collaborative and
integrative approach to the creation, the capturing, the access to and the use of information
assets, that includes the tacit, uncaptured knowledge of people. KM is different from
information - its close cousin, and data - its most distant relative. Knowledge and information
require an understanding of the defined context - their source, their assumptions and their
importance and limitations. This is unlike data, which does not require all these details.
An important feature of the KM theory is that it does not advocate downsizing of the
employee strength in an organization. By contrast, it believes in imparting on-the-job training
to employees, push them towards the goal, and motivate them to get the best out of them. In
addition, the employees are also given opportunities to hone their skills, adapt to the changes
and improve their efficiency.
The KM concept is applicable to every type of organization. To a great extent, the developed
countries are reaping the benefits of KM. This concept seeks to find solutions to
organizational problems with a view to continuously improve the working results. The
approach adopted for this purpose is human-centric in nature. Undoubtedly it is the human
force that forms the biggest asset in any industry/organization. For this reason, it is imperative
that its intuitive and tacit knowledge should be harnessed for productive gains. It is not an
exaggeration to say that nothing really matters for the organization minus its human force.
The hidden tacit knowledge possessed by every employee of an organization, could be
displayed given the right atmosphere and recognition. There are numerous instances of
contributions from employees towards cost cutting, enabling companies to post better results.
We can take the example of an employee of South West Airlines who made a suggestion to her
management. She advised the company to stop printing the logo with the company's brand
legend on the thrash bags, which hang on the back seats of the plane. Her advice, she justified
was aimed at cost-reduction by adding that every passenger of South West Airlines in fact is
very well aware that the services rendered by the airline are exemplary. Hence, the printing of
logo becomes a redundant activity confined to a limited use. The management, in immediate
recognition of the employee's suggestion also profusely rewarded her. The company thus
saved the expenses on printing that annually ran into lakhs of dollars. Clearly, it is the
responsibility of the management to handle the same deftly and to design the infrastructure to
be shared among all its employees.
It is now clear that, employees who possess specialized skills in their respective fields are
embodiments of knowledge. Naturally, an organization should utilize such skills properly and
harness the same. Interestingly, not many organizations have devised systems for this purpose.
Apparently, the management gives the right opportunities to only a few individuals who the
management thinks are only fit enough. As a result, other deserving cases are ignored.

6. SYSTEMATIC APPROACH TO KNOWLEDGE MANAGEMENT
A systematic approach to KM helps to retain the traditional faith in providing a rational
analysis to the knowledge problem. By following a systematic approach, the existing
problems can be solved. However, a new thinking is required to come face to face with new
problems. The basic assumptions of this approach are given below:

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• The real issue of importance is the achievement of sustainable results. Hence, focus will
be on achieving results. Issues such as, the processes or technology or the definition of
'knowledge' are not so important when compared to sustainable results.
A resource must be modeled before it is managed. Hence, various aspects of an organization's
knowledge would require to be modeled.
A number of disciplines and technologies provide solutions to a number of problems.
Alongside these, traditional methods of analysis could also be used to examine and to solve
the problems.
The process of ‘change’ covers not only the employees but also the organization's policies and
work practices. The use of technology boosts the awareness and solutions to business
knowledge problems. Hence, a systematic evaluation of cultural issues should take place.
Though knowledge management is not an exclusive activity or discipline pertaining to
managers, it still remains as an important component of management.
In the light of the above-mentioned information regarding KM, its usefulness for any
organization need hardly be over-emphasized. The organizations that have successfully
implemented KM have experienced growth in terms of performance and profits and at the
same time have improved the employee morale by promptly meeting their genuine needs and
also motivating them to perform. The stage is well-set for the leading organizations of our
country to start trying out this concept for meeting with better results.
7. Emerging Issues
There are certain areas that could pose a challenge to the implementation of corporate
governance. These are explained below:
Firstly, the financial distress in many countries was due to excessive exposure, concentration,
and lending to connected parties, poor credit policy and inadequate management of risk,
mainly foreign exchange risk.
Secondly, the boards have to evolve strategies for ensuring strong internal control systems,
which include internal and external audit functions and also other checks and balances. The
need to set up independent audit committees to help in translating audit reports into
meaningful action, both corrective and preventive, is also imperative.
Thirdly, more steps need to be taken for improving transparency through more information
disclosures regarding corporate governance. In this regard, the banks should examine the
annual reports on corporate governance of such companies wherein appropriate disclosures
have been made.
Fourthly, there are increasing concerns about the conflict of interests. Four areas of the
financial sector carry high risk for such conflicts. These are: underwriting and research in
investment banks, auditing and consulting in accounting firms, credit assessment and
consulting in rating agencies and universal banks.
Fifthly, there is a need for a strong culture of compliance at the top management level in the
organization. The top management will be tested in its response to ethical or reputational
concerns.
Sixthly, there is a need for establishing a consultative process aiming towards harmonizing the
approaches as per the Ganguly Committee's and the Narayana Murthy Committee's (of
SEBI) recommendations.
And lastly, the exercise of corporate governance should not end with commercial banks. There
is a greater need today to extend these principles of good corporate governance practices to
cooperatives, PDs, NBFCs and other financial institutions.
The above mentioned failures in basic risk management are also a reflection of the failure of
corporate governance. The RBI has laid down prudential guidelines, and has also been
emphasizing the need on the part of the Board for better understanding and oversight of key
banking risks. Boards of respective banks will have to take into consideration solvency and
other risks while making decisions. The Basel II proposals also lay emphasis on the

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interaction between sound risk management and corporate governance, The RBI also has
listed out the requirements for sound risk assessment processes, robust controls and
transparency. The responsibility for a bank's overall risk management and performance lies
with the board and senior executives who should understand and guide the bank staff. Further,
the RBI has to ensure that good governance practices are adopted by all banks.
8. The RBI'S Role in Corporate Governance
The corporate sector in India received the Cadbury Report with great interest. The RBI, the
SEBI, the Confederation of Indian Industry (CII), and Associated Chamber of Commerce and
Industry (ASSOCHAM), studied this issue in depth. Consequent to the interest shown and the
studies made by these institutions, the issues related to focus on the crucial role of the Board
of directors and the need for a Code of Best Practices to be followed by them was reinforced.
The RBI has taken the initiative for various steps to be implemented for the sake of corporate
governance in the Indian Banking System. These initiatives can be classified under three
broad categories: (i) Transparency (ii) Off-site surveillance (iii) Prompt corrective action.
In any sound corporate governance mechanism, the aspects of transparency and disclosure
standards comprise as its important constituents. These standards have been improved to be
equated with international best practices. There are, however, many gaps as well. The
disclosures in the areas of risk management strategies, risk parameters, risk concentrations,
performance measures, component of capital structure, etc., in India do not match with the
international standards as yet. There is a need to further broad base the disclosure standards
coinciding with the level of improvement in banks' abilities in analyzing the information
objectively.
The off-site surveillance mechanism facilitates the monitoring in the movement of assets, the
impact on capital adequacy and the overall efficiency and adequacy of managerial practices in
banks. "Peer Group Comparison" introduced by the RBI also reveals periodically data relating
to critical ratios. The RBI thus seeks to put peer pressure on banks for better performance and
governance.
The RBI adopted prompt corrective action, comprising a part of core principles for effective
banking supervision. In addition to the trigger of capital adequacy norms, the RBI introduced
two more trigger points: Non-Performing Assets (NPA) and Return on Assets (ROA) as a
measure for asset quality and profitability. These three trigger points will enable the RBI to
intervene and enforce a set of mandatory actions to check any deterioration in the health of
banks.

Section C: Applied Theory
9. The Coercive Style
A coercive leader demands immediate compliance with his diktats. He expects each of his
directions to be followed in an exact manner specified by him. His style is 'Do what I tell
you.' To get the work done he could create terror, bully employees or treat them in a
demeaning manner. Such a leader would make his displeasure public for even the smallest
mistakes committed by his employees.
Coercive leadership is the least effective of the six styles, because it follows a top-down
approach, throttling the ideas and creativity of employees. This also erodes the performance
of employees whose sole motivation is not money.
Some research studies show that coercive leadership works well on certain occasions: like
during extreme or emergency situations as an earthquake or a fire, or when a company is
undergoing a turnaround or when there is the threat of a hostile takeover.
The Authoritative Style
The authoritative leader is a visionary who motivates people by making clear to them how
their work fits into the larger vision of the organization. Such a style maximizes employee
commitment to the organization goals and strategy. An authoritative leader frames tasks for
his subordinates by defining standards that can help achieve the organization's vision. He
gives both negative and positive feedback to his subordinates who are evaluated for their
consonance with the vision.
The authoritative style is suitable for almost all businesses, and is especially useful when a
business is not performing well. But this style has a few limitations: when an authoritative
leader works with a team of experts or peers who are more experienced than him, he may face
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ego problems in getting along with them.
The Affiliative Style
The affiliative leadership style focuses on people. It lays more emphasis on individuals and
their emotions than on their tasks and goals. An affiliative leader keeps his employees happy
and creates harmony among them. This style promotes camaraderie through better
communication and sharing of ideas. The employees also have more flexibility in doing their
work.
An affiliative leader motivates subordinates through positive and continuous feedback. He
also expresses his emotions openly, thus building relationships naturally, without conscious
effort on his part.
The affiliative style also has its limitations: Its concern for relationships can allow the poor
performance of some employees to go unchecked or uncorrected. Excellence suffers as
employees begin to feel that mediocrity will be tolerated. This style works best if used in
conjunction with the authoritative style.
The Democratic Style
A democratic leader listens to the opinion of his subordinates to win their trust. He gains their
respect and commitment by spending time with them, getting new ideas from them and
building consensus on issues.
When subordinates participate in the decision-making effort and know that their opinion is
valued, their motivation to achieve goals increases. A democratic leader creates a work culture
in which followers are aware of the realities of the situation and know what can or cannot be
accomplished.
Democratic leadership is ideal when the leader needs to have more information, ideas and
guidance. A democratic style may signal a leader who is unsure of himself, or may be the
hallmark of a very competent leader. This style too has its limitations: frequent meetings,
opinion gathering session and diverse opinions may lead to situations where consensus may
not be achieved. The effectiveness of the style depends on the competence of the subordinates
and the leader's ability to accurately assess the value of their opinions.
The Pace-setting Style
As the word pace-setting indicates, a pace-setting leader sets the pace for doing work. He sets
an example for high performance by doing his own work at a high pace. Invariably, a pacesetting
leader is obsessed with working 'better and faster.' He expects his subordinates to
emulate him. He identifies employees who perform below his standards of-work and demands
better performance from them. He may even terminate their services if they do not come up to
his expectations.
This kind of style can vitiate the working environment. Many employees will feel threatened
by the pace-setting leader's hire and fire attitude and demand for excellence. This kind of
leader does not give any feedback to employees. As a result, when the leader leaves, the
followers are at a loss as to what they should do. This is not a desirable situation for any
organization.
This style works well with self-motivated professionals who are highly competent and need
little direction and coordination.
The Coaching Style
A coaching leader helps his employees identify their unique strengths and weaknesses. He
helps them identify their personal and career aspirations and encourages them to establish
long-term development goals. He also helps them achieve these goals.
Such leaders give constant feedback to their subordinates. Coaching leaders delegate power to
a large extent, because they believe in the inherent strengths of their subordinates. They also
teach their employees in the way a coach or teacher would.
This style works well when the employees are aware of their limitations and are willing to
learn. Since leaders are usually hard pressed for time, this style is seldom used. The
effectiveness of the style is limited by the leader's ability to teach and the employees' desire to
learn.
10. RISK BASED SUPERVISION (RBS)
The Reserve Bank of India is moving towards Risk Based Supervision. In this process,
supervisory resources are allocated initially and later on supervisory attention is focused as

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per the risk profile of each institution. The major instruments of RBS comprise on-site
examination and off-site monitoring supplemented by market intelligence mechanism. In
recent times, globally, off-site surveillance has gained primacy, given the ease and promptness
of monitoring.
Given the objectives of RBS, what needs to be done is an exercise of proper allocation of
scarce supervisory resources in accordance with the risk profile of the concerned institution. It
is expected that this approach will lead to an optimal utilization of supervisory resources
while at the same time minimizing the impact of crisis situation in the financial system.
Essentially, the RBS process involves continuous monitoring and evaluation of the risk
profiles of the target institutions that are supervised in relation to their business strategy and
exposure. Apart from strengthening the risk modeling capabilities based on off-site data and
associated research for 'predictive supervision', it would rationalize the overall compliance
burden.
The major elements of RBS approach comprise:
a. Risk profiling of banks,
b. Supervisory cycle,
c. Supervisory program,
d. Inspection process,
e. Review, evaluation and follow-up,
f. Monitorable action plan,
g. Supervisory organization,
h. Enforcement process and incentive framework,
i. Role of external auditors, and
j. Change management implications.
The central function for RBS would be the risk profiling of banks, which, in essence, would
document the various financial and non-financial risks confronting the bank. The risk profile
of each bank, in turn, would entail drawing up of a supervisory program for the concerned
institution, which would be flexible enough to permit amendments warranted by subsequent
major developments. The supervisory follow-up process will seek to ensure that banks take
timely corrective action to remedy or mitigate any significant risks that have been identified
in course of supervision. This would be implemented through the Monitorable Action Plan
(MAP) that would not only outline remedial actions, but also link these to the areas of high
risk identified in the risk profiling and supervisory process. In order to make the framework
incentive compatible, banks with better compliance record and good risk management and
control system could be subjected to a longer supervisory cycle and lesser supervisory
intervention. In case banks fail to show improvements in response to the MAP, they would be
targets of a disincentive package comprising more frequent supervisory examination and
higher supervisory intervention such as directions, sanctions and penalties, including the
mandatory and discretionary actions as enshrined in the Prompt Corrective Action (PCA)
framework. This process would be supplanted by widening the range of tasks and activities
performed by the external auditors. Since the success of the entire process depends upon the
pro-active response of banks, it is essential that banks should have well-defined standards of
corporate governance and documented policies and practices in place to clearly demarcate the
lines of responsibility and accountability.
The following are the several advantages of RBS:
i. It enables supervisors to gain a better understanding of the quality of management,
characteristics of the business and the risks that a bank faces.
ii. It enables supervisory authorities to display more consistency in carrying out
supervisory responsibilities and establish best practices in the supervision of banks.
iii. Explicit linking of tools of supervision to areas of risk or concern helps the banks'
management to understand why a particular supervisory tool is used.
iv. The transaction costs are high in on-site supervision and having obtained a better
understanding of the bank's risk profile process, RBS will be of help to decide the
intensity of the future supervision. The intensity of supervision and the amount and
focus of supervisory action will be commensurate with the perceived risk profile of the
bank.
Page 22 of 23
11. a. Recommended Guidelines for Information Gathering
Considering the sensitivities involved both in information gathering by the banks and
need for privacy of the customer, there are certain guidelines for information gathering.
The recommended guidelines for information gathering can be broadly categorized
under:
• Information relevance
Information accuracy
Notification of information gathering purposes, techniques and sources
Consent of the applicant.
Information Relevance: It is immaterial whether the government views the information
as relevant or not. However, the applicant is entitled to know the need for information
collection. If the bank cannot justify the need for information collection, then it has to
forgo its information request.
Information Accuracy: Banks must ensure that accurate information is gathered. This
criterion applies not only to the bank that gathers information but also to other
banks/agencies who wish to share this information. On an average, it is estimated that in
the US annually about 3 million people request organizations to change their credit
reports that already contain wrong or outdated information.
The problem of erroneous records is attributed to five sources that give rise to the same.
These are:
• Inaccuracy: The primary data may contain erroneous information. If the erroneous
data is not verified before use, it leads to increase in the extent of inaccuracies.
Imperfect Rationalization: This happens when an individual has to choose his response
from a limited set of choices and is not given an opportunity to explain the reason
for his choice.
Bias: Bias occurs due to concealment of certain unfavorable facts concerning
individuals.
Error: Computer and clerical errors in data handling could create erroneous records.
Incompleteness: Records created with missing facts are said to be incomplete
records.
Though regulations are not clear regarding storing and transmitting inaccurate non-credit
related information, banks must exercise care with respect to the erroneous records. This
may make them liable for defamation suits. In order to avoid the risk of maintaining
inaccurate information, many banks update and correct their customers' data files.
Notification of Information Gathering Purposes, Techniques and Sources:
Individuals, information about whom is collected, must be informed about the purpose,
technique and sources of information gathering. Though application forms used by
banks contain these disclosures, sometimes the language is ambiguous and confusing.
The individual concerned should be informed about the disclosures so that information
can be elicited willingly that would be useful to the bank.
Consent of the Applicant: The applicants must be informed about the information
collection and the purpose of exercise. Banks must obtain the individual's consent before
information about his background is collected. Some persons, however, are concerned
with a view that when a person seeks banking facilities, such a person makes himself
vulnerable by signing 'a search warrant without due process'.
b. Operational Risk
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed
technology, human performance, processes or external events. Major operational risk

Page 23 of 23
categories can be identified under five heads namely, organizational, policy/process,
technology, human and external. Banks themselves are primarily responsible for
identifying and managing their operational risks. They should employ internal control
techniques to reduce their likelihood or impact. Where appropriate, risk has to be
mitigated by way of insurance.
Banks initiated the setting up of a risk management team and developed specific
operational risk management tools beginning with the definition of risk indicators in all
segments to serve as early warning signals. The risk management team's responsibilities
in relation to operational risks are:
- Defining high-level operational risk policies to ensure a comprehensive and
consistent approach to the identification and management of operational risk.
- Implementing a group-wise standard methodology to ensure consistency in
operational risk management.
- Communicating and providing general guidance on operational risk related issues,
including regulatory changes and developments, to promote best practices.
- Reviewing and improving various aspects of operational risk management to
reflect industry's best practices and regulatory requirements.
- Approving, from a risk perspective, that all the new products and services that are
launched and ensuring that risks are understood by the organization and managed
appropriately.
- Identifying risk through formal risk reviews, covering specific risks,
activities, business sectors or products, and encouraging pre-emptive action.
Operational risks can be minimized by ensuring that effective infrastructure, controls,
systems, and individuals are in place throughout the organization. Periodic, group-wise
meetings may be held to promote a common understanding of priorities and to foster a
dialogue between the corporate center and the segments. Knowledge and experience
would have to be shared throughout the group with the goal of maintaining a coordinated
approach. All segments shall own the primary responsibility for managing their
operational risks. A bank should collate loss data and initiate self-assessment of risks in
different departments/branches. The state of operations and their inherent risks should be
regularly reviewed, based on extensive audits and follow-up reviews. Audit data can
serve as an early-warning signal for potential trouble spots.


1. The Leadership style which identifies employees who perform below the Leader’s
standard of work and demands better performance from them is known as
(a) Coaching
(b) Pace setting
(c) Democratic
(d) Ethical
(e) Affiliative.

2. The risk that arises on account of poor corporate governance, wrong organization
structure and inappropriate human resource policies is called
(a) Poor Governance Risk
(b) Operational Risk
(c) Liquidity and Funding Risk
(d) Financial Risk
(e) Credit risk.

3. Lead bank scheme was introduced during the year
(a) 1971
(b) 1976
(c) 1969
(d) 1973
(e) 1975.

4. McKinsey group provides a ten step blueprint for a horizontal company. Which of the
following steps is not correct among them?
(a) Structure should be organized primarily around the tasks and not the processes
(b) Senior managers should be made responsible for the processes and process
performance
(c) Customer satisfaction should be used as a basic link to performance objectives and
evaluation
(d) Teams should be made the focus of the organizational performance and design
(e) Vertical barriers in the organization should be broken down.

5. Which of the following is not a principle contained in the 1999 BIS paper which dealt
specifically with the issue of enhancing corporate governance of banks?
(a) Establishment of strategic objectives
(b) Conducting corporate governance in a transparent manner
(c) Ensuring that the board members are qualified and are not subject to undue
influence from others
(d) Protection of the rights of share holders and recognition of the legal rights of stake
holders
(e) Effective follow-up and utilization of audit conducted by both internal and external
auditors.

6. Which of the following statements in not correct regarding principles of performance
measurement?
(a) Performance measurement must be manageable
(b) Greater the number of measures, greater the scope for improving performance
(c) The principle of ABC management applies to performance measurement also
(d) Issues of customer’s concern that are policy oriented can not be managed by a
Branch Manager
(e) Only such issues that could lift customer service quality through internal
management with in a branch should be given utmost importance for rectification.

7. Which of the following is an Interpersonal role performed by a Manager?
(a) Figure head role
(b) Monitor role
(c) Disseminator role
(d) Spokesman role
(e) Resource Allocator role.

8. Which of the following statements is incorrect with respect to ‘Slow Industry Growth’?
(a) When a market is growing, firms try to use resources effectively to serve an
expanding customer base
(b) Growing markets increase pressure on firms to take customers from competitors
(c) Rivalry in non growth or slow growth markets becomes more intense as firms
battle to increase their market shares by attracting competitors’ customers
(d) Battles to protect market shares are fierce
(e) The instability in the market that results from competitive battles reduces
profitability.

9. Which among the following is an operating and liquidity risk?
(a) Liquidity risk
(b) Foreign exchange risk
(c) Credit risk
(d) Price risk
(e) Risk of loss due to technical failure.

10. Leader’s ability to deal with subordinates or followers in a confident, calm and empathetic
manner is referred to as
(a) Objectivity
(b) Technical competence
(c) Physical and Nervous energy
(d) Personal Motivation
(e) Emotional Stability.

11. Which of the following statements is not correct with regard to changes in information
processing technologies?
(a) Changes in information technologies have allowed organizations to move into new
product and market areas at a much faster rate
(b) Advanced information processing technologies have created new concerns for
designing organizational structure
(c) Greater integration and coordination is possible now
(d) Changes in information processing technologies have led to the development of
knowledge -based organizations
(e) Advances in technology have also increased the need for specialization and
standardization.

12. Identify which of the following statements related to Knowledge Management programs
is not correct?
(a) The first generation of KM programs are technology based
(b) The second generation of KM programs lay emphasis on both ‘know how’ and
‘know what’ aspects of knowledge
(c) The ‘know-how’ aspect is related to the business realities
(d) The third generation of KM programs present a situation in which the bank is
concerned with fostering innovation
(e) In the third generation of KM programs, emphasis is also laid on practicing
knowledge.

13. Strategic change is the movement of a bank away from it’s present state towards some
desired future state to increase it’s competitive advantage. The type/s of strategic change
is/are
I. Re-engineering.
II. Restructuring.
III. Innovation.
(a) Only (I) above
(b) Both (I) and (II) above
(c) Both (I) and (III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.

14. Which of the following relating to ‘Product’ and ‘TQM’ is incorrect?
(a) The product is a focal point for the organization’s purpose for existence
(b) A product is in line with an organization’s mission and goals
(c) For making a superior product, TQM envisages a group centered approach
(d) Committed personnel can design a superior product in a centralized environment
(e) The development of a superior product requires collaborative efforts.

15. Which one of the following statements is not correct with regard to stake holders in an
organization?
(a) Stake holders are individuals who are affected either adversely or favorably by an
organization’s operations
(b) Government, investors, employees and customers are all stake holders
(c) Government, investors and employees are linked through implicit contracts and
stake holders like customers are linked through explicit contracts with the
organization
(d) There are third parties, referred to as externalities linked through non-contractual
terms
(e) Stakeholders should be appraised of relevant information pertaining to the
company.

16. Which of the following is a ratio relating to Productivity thereby indicating the long term
sustainability of banking business?
(a) Return on Equity
(b) Operating expenses to Total expenditure
(c) Net interest income to assets
(d) Establishment cost to income
(e) Non performing assets to advances.

17. Which of the following statements is not relevant to Reform phase of banking (from June
1991) in India?
(a) Economic reforms aimed towards a more open/competitive market economy is a
historical initiative
(b) The economic reforms were launched in India under the compulsions of grave
economic crisis
(c) BIFR and SICA enactment came into effect during this phase
(d) Reform phase began from June 1991 with the launching of economic reforms
(e) The reforms had to be designed and implemented in tandem with the
conditionalties agreed with the IMF under a stand by loan facility.

18. Which of the following statements are wrong with respect to an unattractive industry?
I. Has low entry barriers.
II. Suppliers and buyers have strong bargaining positions.
III. No competitive threats perceived from product substitutes.
IV. No rivalry exists among competitors.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) Both (III) and (IV) above
(d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.

19. Which of the following is a Decisional role played by a Manager?
(a) Disturbance Handler
(b) Monitor role
(c) Disseminator role
(d) Spokesman role
(e) Figure head role.

20. Which of the following leadership theories involves the use of decision-tree requiring
‘Yes’ or ‘No’ answers?
(a) Contingency leadership theory
(b) Situational leadership theory
(c) The Leader- Member Exchange theory
(d) The Path goal theory
(e) The Vroom- Yetton model.

21. Bankers will have to take a calculated risk if they are to earn more than their competitors.
Which type of leadership quality helps the banker in this regard
(a) Persuasiveness
(b) Technical Competence
(c) Courageous outlook
(d) Emotional Stability
(e) Empathy.

22. Which of the following statements relating to the process of Enterprise-wide Risk
Management (ERM) is not correct?
(a) The process of ERM consists of Integration of Risk management as a key strategy
(b) The process of identifying and assessing risk must be common across the enterprise
(c) Risk management systems must be developed to provide information and analytical
tools to support the ERM function
(d) Chief Risk Officer position is created with his/her accountability to the Board of
Directors
(e) The process of controlling and financing risk need not be common across the
enterprise.

23. The design dimensions for an organization are:
I. Formalization, centralization.
II. Specialization, standardization.
III. Complexity.
IV. Hierarchy of authority.
(a) Both (I) and (II) above
(b) Both (I) and (III) above
(c) Both (II) and (III) above
(d) (I), (II) and (III) above
(e) All (I), (II), (III) and (IV) above.

24. Which of the following statements pertaining to corporate governance is not correct?
(a) Bank management is under pressure to ensure the safety and soundness of banks
(b) Corporate governance affects the interests of a large cross-section of stake holders
(c) In India, banking sector is totally corporate
(d) Regulation and corporate governance complement each other in the banking sector
(e) Corporate governance has greater implications concerning financial stability.

25. Which of the following measures are correct with reference to a typical executive dash
board designed to improve the over all performance of a bank?
I. Increases the income by 20 percent per year.
II. Earn a minimum net income of 30 percent in mobilizing low-cost deposits.
III. Maintain the total NPAs at below 3 percent level of total assets.
IV. Strive to search 100 percent customer satisfaction level.
(a) Both (I) and (II) above
(b) Both (I) and (IV) above
(c) Both (II) and (III) above
(d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.

26. Which of the following is the Informational Role played by a Manager?
(a) Figure head role
(b) Leader role
(c) Liaison role
(d) Disseminator role
(e) Entrepreneurial role.

27. Which of the following statements relating to ‘Diverse Competitors’ is false?
(a) All companies do not seek to accomplish same goals
(b) All companies do not operate with identical cultures
(c) These differences (a and b above) make it difficult to identify an industry’s
competitive rules
(d) With greater diversity, it is difficult to know the outcomes a competitor seeks
through industry competition
(e) Diversity among firms may cause a company to take competitive actions which can
not improve the firm’s ability to predict competitors’ future actions.

28. Which among the following is a balance sheet risk?
(a) Liquidity risk
(b) Credit risk
(c) Price risk
(d) Risk of loss due to technical failure to execute or settle a transaction
(e) Risk of loss due to adverse changes in the cash flows of transaction.

29. There is a high degree of interest and stake for the government in the banking sector and
the reasons for the same are
I. Small depositors in particular are not in a position to protect themselves.
II. Small depositors are unable to coordinate with each other and they also suffer from
inadequate information.
III. Bank assets in general lack transparency and liquidity.
IV. There is always a fear of contagion effect arising out of an instability and/or failure
of bank(s).
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) (I), (II) and (III) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.

30. Which of the following leadership theories is strongly correlated with low turnover rates,
high productivity and high employee satisfaction?
(a) Super Leadership
(b) The Vroom-Yetton Model
(c) The Leader-Member Exchange Theory
(d) The Path Goal theory
(e) Transformational Leadership.

END OF SECTION A
Section B : Caselets (50 Marks)
• This section consists of questions with serial number 1 – 8.
• Answer all questions.
• Marks are indicated against each question.
• Detailed explanations should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.
Caselet 1
Read the caselet carefully and answer the following questions:
1. Eliminating Fraud is important for banking industry. Elucidate. (7 marks)
2. What are the effects of unethical behaviour? (7 marks)
We will begin by attempting to define a fraud. A fraud represents the effort to obtain
financial benefits, by persons not entitled thereto, by the use of dishonest means,
cheating, misrepresentation, confidence tricks, forgery etc., with or without collusion
from the custodians of public funds. It is an attack on the system. It is the equivalent
of unlawful elements using violent or other means to snatch, loot, rob or steal cash
and valuables – only the methods used in frauds are in the nature of white-collar
crimes. Funds involved in the white-collar frauds usually are much larger,
committed by known persons in whom trust has been wrongly placed, and the
banking channels get misused. It is a crime against banks and the society.
Frauds, as compared to a theft or a heist, are generally detected much later and leave
in their wake much more wreckage by way of shattered careers, lost self-confidence,
and may later lead to the involvement of several detective and punitive agencies like
the Vigilance Department, Police/CBI/ACB etc. There may also be instances of
destruction of evidence. Moreover, when insiders collude, we are also looking at a
form of corruption. Hence, we should be highly intolerant of such white-collar
crimes called frauds as well as all other crimes against banks.
Frauds are Avoidable
Banks will be safer if the branch managers and staff members are vigilant. There is
usually a delay between occurrence and detection of frauds at branches, which is to
be curtailed. Small ‘need-based’ frauds, if not detected in time, lead to bigger ‘greedbased’
frauds. We deal not only with public funds but also with public trust. Frauds
cause not only pecuniary loss to the bank but also tarnish the bank’s reputation.
Occurrence of frauds also leads to crisis of confidence. Incidence of frauds multiply
as the society traverses from the path of honesty to dishonesty and from contentment
to greed. Moral degeneration and desire to maintain a lifestyle, beyond one’s
economic capability are the root causes for the spurt in the occurrence of frauds in
recent years.
Frauds have Serious Fallout
The banks hit by frauds have to spend years to unravel the mystery of a fraud and
punish the guilty. All these add to the cost represented by financial loss and damage
caused to the reputation of the organization in the aftermath of the detection of
fraud. Moreover, destruction of primary evidence is also visible in many cases. In all
such cases, we may not be able to repose trust in any one of our colleagues in the
branch, Frauds committed by insiders, due to abuse of trust reposed in them,
therefore, cause more damage than the frauds committed by outsiders. Branch
Managers have to be on guard as fraudsters may try to win their trust and sympathy.
At the same time, they cannot avoid interacting with the existing and prospective
customers. While they cannot be sure of their intentions, time-tested methods for the
verification of their antecedents have proved effective in foiling fraudulent attempts,
and now KYC norms ask us to do just that.
Corruption Attacks the Core Fiber of the Organization
Corruption is also arguably a form of fraud, It diverts an organization from its
avowed objectives and policies, to what become self-serving policies it can lead to
misuse of power by conferring unlawful benefits to third parties for personal
considerations, against rules and regulations, and in gross violation of the code of
conduct. Gross negligence of duty i.e., dereliction of duties leading to losses is also
equally reprehensible. Due diligence is the watch word for each person working in
the financial sector more so in the banking sector.
Prevention is Better Than Cure
We must not, however, depend only on the deterrence of the punishments since they
come only at the end of the process but must concentrate on removing the
facilitating factors, some of which have been mentioned above, by adhering to our
laid down instructions and norms by intelligently implementing these at the work
place. Good administration helps in good customer service and also helps in the
prevention of frauds. To prevent frauds, the branch manager should be an effective
manager, not simply a popular manager. Preventive vigilance is to be practised by
meticulously adhering to laid down systems and procedures in the branch.
Can Frauds be Prevented?
The real challenge is “can we prevent frauds” in the branches? Yes, we can and we
have, in many cases, by knowing the above weaknesses and taking effective steps to
prevent unholy attempts to exploit those weaknesses. However, the success stories,
where fraudulent attempts have been successfully thwarted, would be rather small in
number because fraudsters, (outsiders and insiders) mostly are shrewd people and
choose to strike only at those branches where the prevailing atmosphere gives an
“open invitation” to fraudsters. In most cases we have only ourselves to blame. Even
if it may not be possible to completely eliminate frauds in banks, it is definitely
possible to minimize the number and amounts involved.
END OF
CASELET 1
Caselet 2
Read the caselet carefully and answer the following questions:
3. List out the various types of Risks in Banking. Explain ‘Poor Governance Risk’. ( 5 marks)
4. What are the practical benefits of ‘Enterprise-wide Risk Management’ (ERM)? ( 5 marks)
Financial risks are unavoidable for financial institutions. These overlapping risks are
often integrated in such a way that they cannot possibly be disentangled. In a sense,
it is the capability of the institution to handle risks that determines its survival in the
dynamic market, where all of the financial markets represent a continuum because of
fungibility of the money and the integration of the markets, both vertically and
horizontally. It is against this background of dynamic market that the Basel
Committee on Bank Supervision has been focusing on the risk management and the
risk absorption capacity of the banks in terms of their capital funds. The inevitability
of the financial risks and the important bearing they have on the net worth of the
bank are the reasons for approaching this problem through the provision of risk
adjusted capital and ensuring that all banks and financial institutions are adequately
capitalized so that the financial soundness and stability of the system is assured.
The BCBS is mainly concerned with the financial stability of the market, which is
the prerequisite for the economic development of any country. The East Asian crisis
has brought home this critical fact. Therefore, in modern times, banks have to
wrestle with risks managing system in their business from various dimensions and
through various activities and transactions and also ensure that these risks are
managed in such a manner that there is adequate compensation for taking such risks.
In other words, the crucial strategic decision that banks have to make is whether the
type and amount of risks assumed by them brings them adequate compensation in
terms of earnings and business growth.
The structure of risk management functions is in place in most banks and financial
institutions, thanks to the regulatory requirements.
Typically, banks need to approach risk management at two levels—at the macro
level and the micro level.
The macro level management will be effective if there is a centralized database
regarding all the transactions of the bank. In the absence of such a data warehouse,
the approach has been rather ad hoc and fragmented based on some select areas such
as foreign exchange or investment. It is a well-known fact that risks are inherent in
various transactions of the bank and hence, for the purpose of understanding we
prepare taxonomy of the risks. They cannot be disentangled in reality and keep
manifesting in different forms in diverse circumstances. Therefore, there is an urgent
need to develop a centralized database of all the transactions, so that the
interconnections between the various risks can be unraveled and handled effectively.
While the specifics of the Indian financial markets may be at variance at
international markets, the basic issue of ensuring adequate risk return in trade is as
important to the Indian entities as it is to the international markets. Of late, this
awareness has increased among the banks, thanks largely to the proactive measures
taken by the Reserve Bank of India (RBI). In fact, RBI has been steadily focusing
the attention of banks to the core issue of risk management since 1999. Several
credit and monetary policies have highlighted the importance of risk
management and indicated the road map for the Indian banks to progress in this
regard. Besides, the RBI has issued guidance notes on credit risks, country risks and
liquidity risks in the form of asset liability management guidelines. However, it has
wisely refrained from prescribing details of the risk management policy or practice
to the banks/financial institutions. The measure taken by the Reserve Bank is to
increase market disclosure with regard to risk management. Beginning from the
March 2003 balance sheet, all banks are required to disclose their risk management
policies and procedures in the balance sheet. The third measure taken to put in place
a proper risk management system in banks is the institution of risk-based
supervision by the RBI and the requirement of risk-based audit by the banks
themselves.
END OF
CASELET 2
Caselet 3
Read the caselet carefully and answer the following questions:
5. Give an account of Banking and Finance in the pre reform period. (8 marks)
6. Discuss the effects of Reforms in the Banking Sector. (8 marks)
The Banking Sector Reforms in India were initiated in 1992. The objectives of
reforms were to strengthen the Indian banks, make them internationally competitive
and encourage them to play an effective role in accelerating the process of growth.
The reforms process also initiated measures for improving the productivity,
efficiency and profitability of the banking system. It was also recognized that the
Indian banking system should be placed on par with international standards in
respect of capital adequacy and other prudential norms. The operational rigidities in
credit delivery system were to be removed to ensure allocation efficiency and
achievement of social objectives,
The policy initiatives taken in this regard were largely based on the
recommendations of Narasimham Committee I & II on Financial Sector Reforms
and Banking Sector Reforms, respectively.
i. Implementation of the recommendations of these two Committees were
carefully sequenced, ensuring that the progress of banking sector reforms takes
place steadily without causing any systemic disruptions.
ii. The major initiatives undertaken in pursuance of the recommendations of the
Committees may be categorized under Deregulation, Prudential Measures,
Competition and Enabling Measures. The policy measures taken in this regard
are as under:
Deregulation
• The statutory preemptions in the form of SLR and CRR have been brought
down in a phased manner to 25% and 4.5% respectively.
• The interest rates have been deregulated in a phased manner. All lending rates
have been deregulated except lending to small borrowers and a part of export
finance. Interest rates on deposits are now almost free except for prescription
in respect of savings deposits and foreign currency deposits. The interest rate
on Government borrowings is also now market determined.
• Banks have been given greater autonomy in the areas like branch
rationalization, credit delivery, recruitment and creation of posts, etc., subject
to fulfillment of certain criteria.
Prudential Measures
• In order to strengthen the financial position of banks, minimum Capital to
Risk Weighted Assets Ratio (CRAR) was prescribed at 8%, which was
further increased to 9% from the year ending March 31, 2000.
• With a view to adopting the international best practices in regard to income
recognition, asset classification and provisioning, the norms introduced in
April, 1992 are being progressively reviewed and revised. The significant
initiatives taken in this regard are prescription of provisioning requirement of
0.25% in respect of standard (or performing) assets, reduction of the time
period for classification of doubtful asset from 24 months to 18 months with
effect from March 31, 2001 and from 18 months to 12 months with effect
from March 31, 2005, introduction of 90 days norms for classification of
NPAs with effect from March 31, 2004.
• The ceiling on exposure to a single borrower has been reduced from 20% to
15% of the bank’s capital funds and group borrower exposure reduced from
50% of bank’s capital funds to 40% with effect from April 1, 2002. Capital
funds for the purpose has been redefined to place it on par with the capital
funds as defined for capital adequacy purposes with effect from March 31,
2002, etc.
• Banks were also advised to classify investment portfolio into three categories
viz., Held to Maturity, Available for Sale and Held for Trading, effective from
September 30, 2000, in line with international best practices.
• With the gradual liberalization of the Indian Financial System and growing
integration of the domestic market with the external markets, the risks
associated with banks’ operations have become increasingly complex,
requiring strategic management. RBI has issued guidelines on Asset Liability
Management (ALM) systems and on integrated risk management systems in
banks. Due to diversity and varying size of balance sheets, banks have been
advised to design their risk management architecture, taking into
consideration the size, complexity of business, risk philosophy, market
perception and the level of capital. With a view to fine-tune the risk
management systems in banks and to help smaller banks in achieving the
minimum standards, RBI has issued guidance notes on credit and market risk.
In order to mitigate the risk in country exposures, RBI has also issued the
guidelines on country risk management.
• The transparency and disclosure standards as prescribed under International
best practices are being implemented in a phased manner, Disclosures
requirements have been further broad-based and banks have been, advised to
disclose maturity pattern of deposits, borrowings, investments and advances
and foreign currency assets and liabilities, movements in NPAs and lending to
sensitive sectors with effect from March 31, 2000. From year ended March 31,
2001, banks were advised to disclose total advances against shares, total
investments made in equity shares, convertible debentures and equity-oriented
mutual funds and total amount of standard/substandard assets subjected to
restructuring. Further, from year ended March 31, 2002, banks are required to
disclose movement of Provisions held towards NPAs, movement of Provisions
held towards depreciation of investments and the total amount of
standard/substandard assets subjected to CDR, etc. From the year ended March
31, 2003, banks have been advised to disclose Country risk exposures, i.e.,
i. Risk category-wise country exposures.
ii. The extent of aggregate provisions held there against.
END OF
CASELET 3
Caselet 4
Read the caselet carefully and answer the following questions:
7. Discuss a few of the Leadership Qualities. (5 marks)
8. Describe the ‘Affiliative’ and ‘Democratic’ styles of Leadership. (5 marks)
As Hersey Paul says, “Leadership is situational”. The transition of commercial
banks from private to public ownership was not difficult, The transition from today
to tomorrow is more difficult, in the context of globalization, technology revolution
and liberalization. Leadership should be non-hierarchical. But public sector culture
in the tradition of government services is based on hierarchy. Banks have radically
restricted their organizations to meet the needs of the 21st Century. Structural change
has not been followed by people’s changes. Government has not relinquished their
rights over “milch cows”. From the appointment of top executives to laying down
policy prescriptions on interest rate, manpower employment and trade union and
political needs, government is maintaining all pervasive control. The top leadership
in bank is in the “command and control” mode, circumscribed by political directives
and trade union needs, which may be either explicit or implicit. With the manpower
trained in manual technology and operating in core banking solutions, pressurized
by unions in day-to-day management and left without support by helpless top
executives, the branch banking in public sector is floundering under stress, In a top
US company, the mission statement says, “Here you are either a leader or candidate
to be a leader”. In branch banking, he is a nominal leader, de facto leadership being
in hands of those who enjoy power without accountability. The typical low key
response in banks is to promote a selected few, young in age, not necessarily in
spirit, out of turn with a series of psychological tests whose authenticity is not
beyond debate or to induct laterally a few from management institutes, as if five
hares will compensate for the speed of 95 tortoises. In a sense, the bank leadership is
situational on day-today basis. The vision at the top is restricted to 1/2 years tenure,
in a period in which no radical transformation can and does take place. Previously,
they were flaunting statistical achievements in priority sector financing, with more
than third of it, being written off or turning bad debt. What is the achievement in the
real sense? Presently, they are reciting profitability statistics, which Indian Banks or
Global Trust Bank (GTB) fiasco in the past has revealed and how fragile all these
can be. Ever greening, writing off loan, moratorium, even if it is a part of declared
public policy, can only postpone the Day of Judgment.
Authentic leaders display consistency in words and deeds. In the present day
banking, excellence is sacrificed for expediency and customer service for employee
relationship. Excellence is a question of spirit. It emanates from a reasonable tenure
of leadership, freedom of planning and action and attitude to do something
remarkable. In private sector financial services, heroic leadership was available as
Shri N Vaghul of ICICI and Shri D Parekh of HDFC. In public sector banking, it was
Shri RK Talwar of SBI. They had reasonably long tenure of leadership, vision of
bank as it should be in the next 10/20 years, ability and willingness to translate
dream into reality and support of chosen and dedicated executives who were
handpicked by them. They were leaders of distinct “change masters” and they had
developed leaders at every level for the next generation. They were not merely
power wielders who treat people as things. They had unquestioned integrity, vision
creating shared meaning and they had aroused, engaged and influenced followers
deeply and widely.
END OF
CASELET 4
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B
Section C : Applied Theory (20 Marks)
• This section consists of questions with serial number 9 - 11.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 - 30 minutes on Section C.
9. Elucidate the following basic qualities of individual entrepreneurs:
a. Personal qualities. ( 3 marks)

b. Business and Managerial skills. ( 3 marks)
10. Explain the Pillars of Total Quality Management (TQM). ( 6 marks)
11. Write short notes on:
a. Sales Force Automation. ( 4 marks)

b. On-site inspection and Off-site monitoring. ( 4 marks)
END OF SECTION C
END OF QUESTION PAPER
Suggested Answers
Management of Banking Companies (MB3H2B): October 2008
Section A : Basic Concepts
Answer Reason
1. B Right option is (b). A Pace setting leader is obsessed with working better and faster.
He expects his subordinates to emulate him. He identifies employees who perform
below his standard of work and demands better performance from them. He may even
terminate their services if they do not come up to his expectations.

2. A Right option is (a) as poor governance risk arises as a result of poor corporate
governance, wrong organization structure and inappropriate human resource policies.

3. C Right option is (c) as Lead Bank Scheme was introduced in December 1969.
4. A Right option is (a) because the first step in the 10 step blue print for a horizontal
company based on the study conducted by McKincy group states that structure should
be organized primarily around the processes and not tasks. All others are correct
steps.

5. D Right option is (d) as the statement consists of basic pillars of OECD code and is not
among the principles contained in the 1999 BIS paper which has specifically dealt
with the issue of enhancing corporate governance for banks.

6. B A common perception among organizations is that greater the number of measures,
greater the scope for improving performance. But it is better to have a limited number
of measures so that they can be managed easily. Hence right option is (b).

7. A Right option is (a) as the Figure head role is important for smooth functioning of an
organization. As a figure head, managers perform duties of a ceremonial nature as
head of the organization/strategic business unit/ department; (b),(c) and (d) are the
informational roles while (e) is the decisional role performed by a Manager.

8. B Right option is (b) as growing markets reduce pressure on firms to take customers
from competitors. All other options are correct with regard to industry growth.

9. E Right option is (e) as (a) and (b) are balance sheet risks and (c) and (d) are
Transaction risks.

10. E Right option is (e) as Leader’s ability to deal with subordinates or followers in a
confident, calm and empathetic manner is referred to as Emotional Stability.

11. E Right option is (e) because advances in technology have also reduced the need for
specialization and standardization. This is because people using advance information
processing technologies have to do work that requires a broad understanding of how
organization gets it’s work done.

12. C Right option is (c) as ‘know how’ aspect includes the procedural knowledge relating
to banking. All other options are correct. The’ know what’ aspect is related to the
business realities.

13. E Right option is (e). The various types of strategic change are: Re- engineering,
restructuring and Innovation.

14. D Right option is (d) as committed personnel can design a superior product with support
from leadership working in a decentralized environment. All other statements are
correct with reference to a Product and TQM.

15. C Right option is (c) as the Government, investors and employees are linked with the
organization through explicit contracts, other stakeholders like customers are linked
through implicit contracts. All other statements are correct with respect to
stakeholders in the organization.

16. A Right option is (a) as it is the only productivity ratio and all other options relate to
business ratios.

17. C Right option is (c) as BIFR and SICA enactment came into effect during the
consolidation phase which refers to the period from 1984 till 1991. All other
statements are relevant to Reform phase in India which began from June 1991.

18. C Right option is (c) as both statements (III) and (IV) are wrong. An un attractive
industry has strong competitive threats from product substitutes and intense rivalry
among competitors.

19. A Right option is (a). As a disturbance handler, the manager responds involuntarily to
pressures. Examples of various pressures could be worker strike, declining sales,
bankruptcy of a major customer etc; (b), (c) and (d) are informational roles and (e) is
interpersonal role.

20. E Right option is (e) as this Leader participation model involves the use of decision tree,
requiring ‘Yes’ or ‘No’ answers. It incorporates contingencies about task structure and
alternative styles of leadership.

21. C Right option is (c) as the quality of courageous outlook refers to the perseverance to
accomplish goals regardless of seemingly insurmountable obstacles. Leaders are
confident and calm even under stress. In financial terminology, this refers to the risk
factor. Naturally, bankers will have to take a calculated risk if they are to earn more
than their competitors.

22. E Right option is (e) because the process of identifying, assessing, controlling and
financing risk must be common across the enterprise.

23. E Right option is (e) as the design dimensions for an organization are formalization,
centralization, specialization, standardization, complexity and hierarchy of authority.

24. C Right option is (c) as in India, banking sector is a part of the corporate sector, but not
necessarily totally corporate. The reason being that a major position of the banking
sector is government owned. Public sector banks are leading players in the business.
All other statements relevant to corporate governance are correct.

25. B Statements given under (II) and (III) are wrong (I) and (IV) are correct and hence
right option is (b).

26. D Right option is (d) as in the Disseminator role, after collecting the information, the
Manager has to pass some of the information to his subordinates. The Manager’s role
becomes important when the subordinates do not have contact with one another.
(a),.(b),and (c) are interpersonal roles while (e) is decisional role.

27. E Right option is (e). Diversity among firms sometimes causes a company to take
certain competitive actions just to see what the competitors’ responses will be. Doing
this can improve the firm’s ability to predict competitors’ future actions.

28. A Right option is (a). (b) and (c) are Transaction risks. (d) and (e) are operating and
liquidity risks.

29. E Right option is (e) because all the statements (I), (II), (III), (IV) constitute the reasons
for the high degree of interest and stakes for the government in the banking sector.

30. E Right option is (e) as transformational leaders are charismatic and visionary. They can
inspire followers to transcend their self interest in favor of organization’s interests.
Transformational leadership is strongly correlated with low turnover rates, high
productivity and high employee satisfaction.

Section B : Problems
1. Eliminating Fraud
Eliminating fraud is important for the banking industry for three reasons:
• Fraud is considered as a criminal activity by society, and the criminal justice system
becomes operative instead of individual privacy.
• Investigation of a fraud does provide rights to both the banker investigating the fraud and
the individual/s who committed the fraud to have the right to privacy.
• Frauds committed on banks increase costs to the banks and affect their net worth.
Bankers enjoy the right to know the criminal behavior of fraudsters who affect their business.
Roper Starch Worldwide Inc., a US-based firm, conducted a survey on the elimination of
fraud. It found that 74% of respondents were willing to contribute extra money for fraud
investigation and prosecution. This tendency has also been confirmed by another survey
conducted by MasterCard International. This survey revealed that customers were prepared to
forgo privacy if that could help to protect them against fraud.
Investigation of fraud by banks is a quasi-public service. In this context, the ethical behavior
of investigators has to be judged against the ethical standards set for public officials
conducting similar investigations and prosecutions.
Banks must use any adversarial information to overcome individual privacy in pursuit of
social good. There will be conflicts however, when banks combine data gathered for different
purposes. One such example is that data in customer service records are combined with
screening out data. Thus, it is difficult to concentrate both on the interest of the consumer and

the interest of the bank simultaneously. In this conflict, the interests of the bank shall always
dominate.
2. Effects of Unethical Behavior
Unethical behavior distorts the market system that leads to inefficient allocation of resources.
Some effects of unethical behavior viewed from the macro perspective are discussed below:
• Bribery: A bribe is associated with a personal gain to the decision-maker and is used for
the purpose of making one choice appear more attractive than the other. Though the
decision-maker's attraction towards the final choice is determined by the bribe, he may
still be not satisfied with the choice. The negative effect of bribery is that it causes more
resources to be allocated to a less desirable alternative. If bribery is the motivating factor
for doing a service like disbursal of credit, it causes distortion in allocation of resources.
• Deception: The effect of deceptive information is that it creates false impressions about
goods and services and forces buyers to purchase goods and services that may not satisfy
them. Deceptive information sometimes affects timely delivery of goods and services.
Such delays in the delivery of goods and services results in disruptions in production
leading to higher costs in output. Deceptive information also distorts the market system
by allocating resources to items that are to be sold or delivered rather than offering the
goods and services that the customers really desire. Banks should be careful while
explaining the actual facilities that can be realistically provided to the customers.
• Coercion: The exercise of power and influence through a coercive act decreases the
effectiveness of competition. The effect of coercive acts is reflected through the acts of
sellers who are refrained from dealing with certain customers and buyers who are
prevented from purchasing from certain sellers. As a result, buyers purchase inferior
goods and services by paying a higher price; such activities would effectively lower the
demand for goods and services. Coercion cripples competition, which leads to the
production of inferior goods and services. On the other hand, since buyers have no other
choice except to purchase such goods and services, they would feel dissatisfied. In
banks, it is a normal practice for customers to go for a change in banks for availing better
service. Under such circumstances, banks are not expected to use coercion on the
customer to continue their operations.
• Theft: The act of theft increases the cost of production of products and/or services.
Losses arising out of theft are made up by increasing the price of products and services.
The consequent reduction in demand results in misallocation of resources. At the
extreme level, high-degree of theft may force the company to withdraw its products or
services from the market. Thefts of numbered instruments in banks like demand drafts
can cause severe inconvenience to the customers.
• Discrimination: Unfair discrimination is the denial of normal privileges due to certain
people on the basis of their gender, ethnicity, race, religion, etc. Though unfair
discrimination is banned by law, there are certain sellers who deny goods and services to
certain buyers for some reasons as mentioned above. Lending to borrowers under
priority sector is a major area where bankers are to show proper judgment and not
discriminate against customers. Bribery, deception, coercion, theft and discrimination
contribute to an increase in the cost of goods and services. These acts also contribute to
the misallocation of the country's resources. Based on this analysis, we can state that
ethical behavior is a prerequisite for the effective functioning of a market system in
general and the banking system in particular.

3. TYPES OF RISKS
Various types of risks are:
• Change Management Risk
• Operational Risk
• Liquidity and Funding Risk
• Financial Risk
• Credit Risk
• Poor Governance Risk.
Poor Governance Risk
This risk arises as a result of poor corporate governance, wrong organization structure and
inappropriate human resource policies. Ideally, a bank's policy for managing Governance,

People and Organization risk are to be set out in the bank's policy manual.
A bank, depending upon its business priorities, should organize itself into different -business
units. Such units should be run in a manner consistent with strategic directions from the top
management.
The business units should focus on tight financial and operating controls and prudent risk
management. Various industry best practices on corporate governance should be implemented.
Emphasis should be laid on the importance of conducting business with integrity, due skill,
care and diligence.
The Board of Directors and the senior executives at different levels should receive
information regularly in line with business objectives. It has to be ensured that activities are
appropriately controlled, key risks are identified and monitored, decisions are implemented
and all regulatory obligations are met.
Audit control enables an independent review with regard to adherence to the policies and
processes that are to be implemented. The head of the Audit department should meet the
branch managers on a regular basis and should also interact periodically with the Audit
Committee. The branch managers should ensure that all the staff members act with integrity.
The employees must be encouraged to alert the branch manager and the controlling offices in
case of suspected misconduct, fraud or any other serious malpractices.
4. PRACTICAL BENEFITS OF ERM
An ERM model strengthens the bank's ability to identify and assess risks; aggregate risks and
define the corporate risk appetite; develop solutions for reducing or transferring risk, where
appropriate; and exploit risks to generate competitive advantage.
Banks need an ERM framework to relate capital reserves more effectively to their actual level
of risk exposure. By aggregating and analyzing risk by type and across lines of business, they
will be in a position to quantify the amount of capital required to absorb unexpected losses.
ERM also contributes to a better business performance for the bank's clients in all industries.
Net income and return on investment or equity are commonly used to compare business
performance, but they do not consider the level of risk taken to achieve those results.
However, a Risk-adjusted Rate of Capital (RAROC) can be determined by dividing a unit's
net income by its economic capital, producing a profitability measure that is common across
business units. A risk-adjusted return that is more than the cost of the related economic capital
employed contributes value to the organization and its shareholders. The RAROC approach
can also be extended to evaluate pricing decisions and product profitability, and to
differentiate between relationships that make money for an institution and those that do not.
RAROC is also an important factor in making risk transfer decisions against a policy that
establishes the level and types of risk an organization is willing to absorb and the content of
its risk portfolios. The benefit of potential risk transfer strategies can be determined by
comparing the potential decrease in economic capital and risk of loss against the cost of
insuring or hedging the position.

5. Banking and Finance in the Pre-reform Period
At the time of independence, saving and investment in India were low and only two-thirds of
the economy was monetized. Net domestic saving as percent of Net Domestic Product (NDP)
at market prices was only 9.3 percent in 1960-61, which rose to 11.8 percent in 1969-70
(Reserve Bank of India, 1978). The saving mobilization was on the household sector as other
sources were limited. Most of the savings of household sector was in the form of financial
assets, and bank deposits dominated the financial asset portfolio of households.
The major objective of bank nationalization in July 1969 was to intensify the social objective
of ensuring that financial intermediaries fully met the credit demands for productive purposes.
Two significant aspects of nationalization were (i) rapid branch expansion, and (ii) channeling
of credit according to plan priorities. So banks had to expand in such areas, which were not
covered previously. The purpose was not only to increase potential savings but also to meet
the credit gaps in agriculture and small-scale industries so as to increase the economic activity.
This was augmented when the Lead Bank Scheme was introduced in December, 1969 for the
purpose of mobilization of deposits for planned expansion of banking facilities and to bring
about greater regional balance. In April 1980, six more private sector banks were nationalized.
However, these measures also resulted in inefficiencies in the banking system. The
administered interest rate structure was high, and so was the Cash Reserve Ratio (CRR) and
also the Statutory Liquidity Ratio (SLR). The structure of administered interest rates has
gradually been dismantled. Prescriptions of rates on term deposits, including conditions of

premature withdrawal, have been dispensed with. Lending rates have since been gradually
deregulated. The Bank Rate, which had for long remained a dormant policy tool, was
activated in 1997 as a signaling rate and the entire spectrum of interest rates for any refinance
or liquidity support from the RBI, have since been linked to the Bank Rate.
Firstly, the market for short-term funds was reserved for banks and the market for long-term
funds was the exclusive domain of Development Financial Institutions (DFIs). Direct access
of corporate borrowers to lenders (disintermediation) was strictly controlled and Non-banking
Financial Companies (NBFCs) were allowed to collect funds only for corporates. These
adverse developments coupled with the balance of payments crisis, which followed in the
wake of the Gulf War of 1990 led to the erosion of public savings and the inability of the
public sector to generate resources for investment rapidly brought forth the imperatives for
financial sector strengthening in India. Although these reforms were also provoked by the
globalization trends around the world almost around the same time, there was a distinct Indian
flavor in the pace, sequencing, caution and complementarity. The Indian approach to financial
sector reforms was cautious and focused on proper sequencing by complementing between
reforms in banking sector and changes in fiscal, external and monetary policies; developing
financial infrastructure; and developing financial markets. This approach is in contrast with
the 'big-bang' approach pursued in several countries. This gradual approach is credited with
the advantage of enhancing macro stability, and at the same time, fostering the microeconomic
linkages. And, the gradualism was the outcome of India's democratic structure and was based
on a popular consensus. While the crisis of 1991 favored bolder reforms the pace had to be
calibrated to what would be acceptable in a democracy. Secondly, structural adjustment
measures were undertaken in simultaneity with liberalization program. Thirdly,
macroeconomic stability was made a priority. Fiscal and external sector policies supported the
monetary policy in maintaining overall balance. Prudential regulations were put in place to
ensure safety and soundness, while transparency and accountability in operations were aimed
at restoring the credibility of the banking system. Fourthly, recognizing the inter-linkages
between the real and financial sectors, wide-ranging reforms were also undertaken in the real
sector so that financial intermediation kept pace with underlying economic activity.
6. EFFECTS OF THE REFORMS
The recommendations of the Narasimham Committee in 1991 heralded the first generation
reforms of the financial system. While these reforms were being implemented, the world
economy also witnessed significant changes, 'coinciding with the movement towards global
integration of financial services' (Narasimham Committee, 1998). Against such backdrop, the
Report of the Narasimham Committee II (NCR-II) on Banking Sector Reforms provided the
framework for the current reform process.
Firstly, the impact of reforms is evident in both the widening (as reflected in the financial
interrelations ratio) as well as the deepening (as evidenced by the intermediation ratio) of the
intermediation process and well as its positive influence on growth. In addition to banks,
various other intermediaries, including financial institutions, mutual funds and non-banking
financial companies, are also engaged in the process of intermediation.
Secondly, the statutory pre-emptions have gradually been lowered. This has enabled banks to
commit a greater quantum of resources for commercial purposes.
Thirdly, the administered interest rate structure of banks, both on the deposit and lending side,
has been progressively rationalized. Fourthly, steps have been initiated to strengthen PSBs and
infuse competition into the banking system. To increase competition, new banks in the private
sector have been allowed to enter the industry and foreign banks have been given more liberal
entry. In addition, measures have been taken to broaden the ownership base of PSBs. Banks
have been given flexibility to rationalize their branch network. Fifthly, with regard to
prudential requirements, norms for Income Recognition and Asset Classification (IRAC),
introduced in 1992, have been strengthened over the years in line with international best
practices. As regards IRAC norms, the time for classification of assets as non-performing has
been tightened over the period, with a view to move towards the international best practice
norm of 90 days.
Sixthly, the banking system has attained greater transparency. This applies both to prudential
norms (disclosure of capital adequacy ratios - tier I and tier II separately, net Non-performing
Assets (NPAs) ratios, provisions and more recently, the maturity profile of loans and
advances, investments, movements in NPAs and lending to sensitive sectors, such as capital
market, real estate and commodities) as well as securities portfolio. Public Sector Banks
(PSBs) began attaching the balance sheet of the subsidiaries to their balance sheets beginning
from 2000-01, to bring greater transparency in operations and move towards consolidated

supervision. In addition, the introduction of asset-liability management practices since April
1999 (subsequently extended to financial institutions), fortified with the enunciation of risk
management guidelines covering broadly the areas of credit, market and operational risks
have enabled banks to have a clearer idea of their mismatches and undertake preventive steps.
By 1997-98, there was a significant improvement in the performance of the banking system.
The profitability of PSBs showed a distinct improvement, measured in terms of operating
profits. Reflecting the efficiency of the intermediation process, there has been a decline in the
spread between the borrowing and lending rates as attested by the ratio of net interest income
to total assets from 3.22 percent in 1991-92 to 2.70 percent in 1999-2000. Seventhly, the
liberalization measures have permitted a refocusing of supervisory strategy from one of
micro-management to one of macro-governance with the establishment of a quasiautonomous
Board for Financial Supervision (BFS) in 1994. The supervisory strategy of the
BFS consists of a four-pronged approach, including (i) restructuring system of inspection, (ii)
setting up off-site surveillance, (iii) enhancing the role of external auditors, and (iv)
strengthening corporate governance, internal controls and audit procedures. Detailed off-site
surveillance of banks, financial institutions and NBFCs is based on a quarterly reporting
framework covering mandated aspects of liquidity, solvency and asset quality. It has been
combined with on-site inspection, based on the evaluation of total operations and performance
of banks under the supervisory rating framework based on the CAMELS (Capital Adequacy,
Asset Quality, Management, Earnings, Liquidity and Systems) methodology for Indian
commercial banks and CACS (Capital Adequacy, Asset Quality, Compliance and Systems) for
foreign banks. The role of external auditors has been enlarged: besides auditing annual
accounts, they are required to verify and certify financial ratios to be disclosed in the balance
sheet. This has enabled regulators to have a clearer understanding of the true financial position
of banks and take remedial measures, as warranted.
Eighthly, having an institutional architecture in terms of markets, technological and legal
infrastructure is a pre-requisite for the efficient functioning of markets. Since 1997, efforts to
develop and fortify the domestic financial architecture have been intensified, albeit with a
distinct country-specific approach. Several new initiatives on the technological front such as
the setting up of the Indian Financial Network (INFINET), a Wide Area Satellite based
Network using VSAT technology, Shared Payment Network System, initiatives for Electronic
Fund Transfer have already been undertaken. A Real Time Gross Settlement (RTGS) system,
with system requirement specifications to take into account international best practices and
the specific requirements of Indian banking is being started. Ninthly, the changes in the policy
environment have been supplanted with changes in the conduct of monetary policy and
financial markets.
A brief encapsulation of the salient features of the monetary policy: The monetary policy
framework followed in India from mid-eighties till 1997-98 was by and large a 'monetary
targeting' framework, with broad money being the intermediate target. However, the
deregulation and liberalization of financial markets and increasing openness necessitated the
adoption of a 'multiple indicator' approach in 1998-99, wherein interest rates or rates of return
in different markets (money, capital and Government securities markets) along with high
frequency data on currency, advances by banks and financial institutions, fiscal position, trade,
capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange
have been juxtaposed with output data for drawing policy perspectives. While the twin
objectives of monetary policy of maintaining price stability and ensuring availability of
adequate credit to productive sectors of the economy to support growth have remained
unchanged, the relative emphasis on either of these objectives has varied over the years
depending on the requirements of the macro-economy. With the change in the institutional
context of conduct of monetary policy pursuant upon the adoption of Ways and Means
Advances (WMA) in 1997, indirect instruments of monetary control have come to the fore.
Consequently, the thrust of monetary policy in recent years has been on the use of instruments
in a more flexible and bi-directional manner. A Liquidity Adjustment Facility (LAF) has been
introduced since June 2000 to modulate short-term liquidity and signal short-term interest
rates. The LAF, in essence, operates through repo and reverse repo auctions, thereby setting a
corridor for the short-term interest rate consistent with policy objectives. This has been
supplanted with wide-ranging reforms in the financial markets.
7. LEADERSHIP QUALITIES
Researchers have tried to identify some of the main traits that distinguish leaders from nonleaders
and successful leaders from unsuccessful ones. They evaluated cognitive and
psychological factors, physical characteristics and many other parameters while arriving at

their conclusions. On the basis of these traits and qualities, they have developed different
theories of leadership.
Some common leadership qualities are:
• Emotional Stability: This refers to the leaders' ability to deal with subordinates
or followers in a confident, calm and empathetic manner. Business matters can create
tension and ill-will. Bankers should maintain poise particularly while dealing with
difficult customers who may be demanding too much or who may be a loan-defaulter.
• Knowledge of Human Relations: This refers to the leader's understanding of human
behavior, needs, emotions, feeling, etc. Banks recognize the importance of
understanding human behavior and provide certain special services such as all-ladies
branches, special counters maintained at off-site places and at odd-hours to meet the
specific needs of students.
• Empathy: This quality enables a leader to look at things from another person's point of
view objectively. CRM is all about putting oneself in the other man's shoes. Bankers
without exception recognize its importance.
• Objectivity: This refers to the leader's ability to take practical decisions. Particularly,
while taking a credit related decision, bankers remain objective and in spite of various
other factors, a balanced and considered decision is taken whether or not to sanction a
credit facility to the proposed borrower.
• Personal Motivation: This quality refers to the leader's enthusiasm for getting the job
done through his followers. In simple words, the branch manager himself should enjoy
his assignment and infuse enthusiasm amongst his staff.
• Communication Skills: These refer to the ability to speak and write in an articulate and
forceful manner. The banker's ability to canvass new accounts and convince customers is
determined mainly by his communication skills.
• Teaching Ability: This quality enables a leader to inspire followers. There are different
types of accounts and businesses performed in a bank. A majority of staff are not aware
of different functions within a branch/bank. When a person takes charge of a new
function, the leadership at the branch level/bank must ensure that the employee becomes
knowledgeable and is also trained to discharge his duties effectively.
• Social Skills: This helps a leader understand the followers' strengths and weaknesses. It
also makes a leader appear approachable. In other words, maintenance of cordial
relations with staff and customers is possible if a branch manager understands his
colleagues and customers.
• Technical Competence: This gives the leader working knowledge of and an insight into
operations carried out under his guidance. For example, in matters relating to credit
appraisal or maintenance of computer systems, the concerned supervisor must possess
the technical competence for taking a decision. Otherwise, it could lead to failure.
• Physical and Nervous Energy: These are the physical qualities that are needed for the
leader to work effectively and enthusiastically under stress and strain. Naturally, leaders
must possess and display abundant physical energy and must be able to work under
stress. Pressures from various quarters like customers, staff and superiors can make the
manager's job difficult if he does not enjoy the physical strength to deal with such
pressures.
• Persuasiveness: This refers to the ability to persuade another to agree with one's point of
view. Leaders possessing this quality can get their work done easily. Service industry
thrives on the art of persuasion. This could be with regard to marketing a bank's product
or dealing with an irate customer or even a colleague.
• Creativity and Vision: This refers to the ability of leaders to anticipate the future. In
view of a very high level of competition between banks, they have become innovative
and are offering unique products and also giving unique names to such products.
• Inspirational Ability: This refers to companies of physical and mental qualities that
give a leader the ability to inspire their followers to action. This is an absolutely personal
quality and the extent of inspiration that a manager can provide to his colleagues
depends on one's ingenuity.
• Imaginative Mind: Imaginative leaders can devise new goals, ideas and solution to
problems. As different problems have different kinds of solutions, managers look to
solve problems differently. For instance, a similar problem of two different customers
may be solved in two different ways, and both may return satisfied.
• Courageous Outlook: This refers to the perseverance to accomplish goals, regardless of
seemingly insurmountable obstacles. Leaders are confident and calm even under stress.
In financial terminology, this refers to the risk-factor. Naturally, bankers will have to
take a calculated risk if they are to earn more than their competitors.
8. The Affiliative Style
The affiliative leadership style focuses on people. It lays more emphasis on individuals and
their emotions than on their tasks and goals. An affiliative leader keeps his employees happy
and creates harmony among them. This style promotes camaraderie through better
communication and sharing of ideas. The employees also have more flexibility in doing their
work.
An affiliative leader motivates subordinates through positive and continuous feedback. He
also expresses his emotions openly, thus building relationships naturally, without conscious
effort on his part.
The affiliative style also has its limitations: Its concern for relationships can allow the poor
performance of some employees to go unchecked or uncorrected. Excellence suffers as
employees begin to feel that mediocrity will be tolerated. This style works best if used in
conjunction with the authoritative style.
The Democratic Style
A democratic leader listens to the opinion of his subordinates to win their trust. He gains their
respect and commitment by spending time with them, getting new ideas from them and
building consensus on issues.
When subordinates participate in the decision-making effort and know that their opinion is
valued, their motivation to achieve goals increases. A democratic leader creates a work culture
in which followers are aware of the realities of the situation and know what can or cannot be
accomplished.
Democratic leadership is ideal when the leader needs to have more information, ideas and
guidance. A democratic style may signal a leader who is unsure of himself, or may be the
hallmark of a very competent leader. This style too has its limitations: frequent meetings,
opinion gathering session and diverse opinions may lead to situations where consensus may
not be achieved. The effectiveness of the style depends on the competence of the subordinates
and the leader's ability to accurately assess the value of their opinions.

Section C: Applied Theory
9. Personal qualities as the recipe for success are:
• Future thinking and ability to face uncertainty: A sensible and a successful
entrepreneur/banker exhibits good understanding and ability to adjust for difficult
situations.
• Patience and perseverance: Successful entrepreneurs are normally willing to work
long, hard hours and willing to weather the highs and lows of business. To successfully
procure more business employees/agents would be required to work at odd-hours and
on holidays and under oppressive conditions. Bankers today conduct customer contact
exercises in road-side tents, on holidays, in market centers or during melas.
• Love challenge and are driven by a need to challenge one's self: The very fact that
banks are able to survive in this era of higher costs and lower spreads is an ample
indication of the fact that bankers today indeed are driven by challenge.
• Ability to conceptualize: As natural leaders, entrepreneurs unlike others find and solve
problems quickly. They are used to uncertainty and ambiguity. Hence, they do not feel
uncomfortable when confronted with such issues.
• High tolerance for ambiguous, unstructured situations: The fact that the bankers'
services are aimed at a wide range of customers and that customers' needs are varied
puts pressure on bankers to serve and also sets the tone for ambiguity in decisionmaking
and unstructured decisions. Successful managers overcome this problem,
• Emotionally Stable: A successful entrepreneur is emotionally stable and under control
to handle any business pressure. To them, stress is not unwelcome, since they find
setbacks to be more challenging rather than discouraging. Such persons are always on
the go and need constant activity to vent their energy.

• Possess a desire for change and constant improvement: Employees/agents frequently
monitor social trends and adopt new products. For instance, of late the emerging
importance of educational loans has been recognized and implemented by most banks.
• Action-oriented: The need to perform and survive has encouraged multi-faceted action
programs.
• Think positively and quickly get over their failures: Weak banks in particular have
emerged stronger. Dena bank, Syndicate Bank, Indian Bank prove that positive thinking
and putting failures behind are key factors for success.
• Learn quickly, enjoy feedback, and are able to learn from mistakes: Implementation
of technology based delivery systems like ATMs and Internet banking, introducing and
improving deposit and loan schemes and implementing Risk Based Supervision are
developments to substantiate this aspect.
• Both listen and communicate well: The importance to deliver extremely good
customer-service both across the counter and through back-office operations is
reinforced with the bank managements attaching increased significance to this segment
of banking operations.
• Independent and extroverted: The banker needs to take decisions and demonstrates
independence in decision-making and the fact of meeting customers' requirements brings
out the extrovert in the banker.
• Self Discipline: This quality is very much evident as entrepreneurial zeal creates
fiercely independent people. Such persons do not like others telling them what to do.
Branch mangers possessing this quality take decisions and own the responsibility for
such decisions.
• Self-confident and determined to succeed: A successful banker also demonstrates
these basic qualities of a good entrepreneur.
• Creative, innovative and open-minded: The history of changed scenario in the
banking industry as seen during the post nationalization and post liberalization eras
have brought the best out of successful bankers during this period.
• Status: Successful executives are uncomfortable with personal praise. They love having
their business praised. Such persons have the eye for status in the performance of their
business, and not just in the outward appearance that they present to others. Importantly,
their ego does not prevent them from seeking advice or guidance from others.
The various business and managerial skills are:
• Ability to set realistic attainable goals: A bank that specializes in a particular service
or product attaches more importance to such strengths in business planning.
• Love to take risks, but ensure that these risks are calculated, not foolish: Obviously,
the level of NPAs is a major factor that influences the results of a bank. Hence, banks
look to take all precautions and steps to maintain good asset quality.
• Competent enough to make strategic decisions during uncertainty: The banker can
work on a number of things simultaneously, keeping all details and possibilities in mind,
while being conscious of the need to complete tasks immediately.
• Able to exert influence and inspiration on others without a need to impose status or
power: The successful manager is able to get along with his colleagues and customers
without being inaccessible.
• Able to get along with and adapt to all types of people: The basic skill of adaptability
to different situations and people is reflected as bankers deal with a wide range of
customers and services.
• Interpersonal interaction: they develop interpersonal skills for growth of business. The
absence of these skills would create a negative impact on the staff as leaders would then
not be able to delegate, become impatient and lack sensitivity.
• Able to trust others and give out responsibility: Significantly, the banking industry
survives on the mantra of 'good faith'.
• Possess good communication skills: The highly competitive environment persuades a
banker to bring the best out of him both in terms of oral and written communication,
whether with the customers, staff or other stakeholders.
• Possess general financing, production, administration, human resources, sales and
marketing skills: All these skills are a mix of specialized and general skills. Banks
attach lot of importance to the cultivation of these skills in the employees. Many training
programs are held based on these contents.
10. Product
The product is a focal point for the organization's purpose for existence. A product is in line
with an organization's mission and goals. The organization derives a sense of achievement
through the product. The success or failure of a product can also be a measure of
organizational effectiveness.
For making a superior product, TQM envisages a group-centered approach on the part of
personnel involved in its creation. Committed personnel can design a superior product with
support from the leadership, working in a decentralized environment.
For creation of superior quality products, organizations need employees with a productmindset
who focus on the product instead of the job. The group-centered approach fosters a
feeling of pride and common purpose through team effort. The feeling of pride follows from
the joy of creating the product, and the sense of common purpose further reinforces team
spirit. As a result, work gets better and the organization achieves total quality.
The development of a superior product basically requires collaborative efforts, support from
top management and a continuous feedback.
Process
Superior products alone cannot fulfill organizational goals. For this, additionally an effective
process that has an interface with the customer and product is required. In a bank, TQM
should aim to deliver the right product to the customer through cost-effective and qualitytuned
processes following a customer-centric approach. Hence, customer focus is essential in
designing the product and the process in TQM.
Organizations try to deliver an assortment of products as customer needs and wants keep
changing. This calls for different yet effective processes that can deliver such products.
Therefore, the processes need to be customer and product focused. Thus, TQM follows a
customer-product-process-product-customer cycle.
Effective processes in TQM begin with 'doing it right the first time'. As a result, wastage of
time, money and other resources cease to exist since the product attains the desired quality
level in the first instance itself. The process pillar can get strengthened with support from the
leadership and employee commitment. For measuring the effectiveness of the process, an
array of tools such as Statistical Process Control, benchmarking, PERT, histogram and
Quality Loss Function are used.
Leadership
The successful implementation of the TQM program is determined to a great extent by the
leadership in an organization. This is due to the reason that only a determined top
management can effectively lead the change to a total quality mindset.
Leadership guides how to organize and build competence, creativity and
commitment to the entire quality program. The importance of leadership in the TQM process
can be better understood, by differentiating between leadership and managership. Leaders
with vision and zeal chart a course for their followers or teams and change the concept and
structure of the organization. Leaders do the right things. Managers do things right, and are
bogged down by the technicalities of the process.
Managership is responsible for the implementation-process and leadership is essential to
implement the process successfully. As mentioned earlier, leadership should empower
employees by decentralizing the decision-making process. Instead of following a completely
top-down approach, a successful organization fosters employee commitment and
participation. Decentralized leadership that fosters human and social values is ideally suited
for TQM.
Commitment
Commitment from leaders and employees alike is necessary to achieve a goal. It also
encourages achieving superior quality and higher productivity. Leaders who lack committed
followers are bound to fail. The leaders need to build committed followers through
empowerment and decentralization.
Securing employee commitment to the process of TQM through an attitudinal change in them
made possible by suitable alterations in the organizational structure, practices and policies. At
the outset, a desire for the TQM process has to be created and nurtured in the employees
before building their commitment to quality. Fostering pride in work, workmanship and

motivation can do this. Adequate importance needs to be attached to compensation issues of
employees, such as linking pay to their performance and productivity.
TQM cannot be successful without commitment from the employees. Employees not only
need to do it right the first time, they also need to 'believe' in doing it right the first time. The
organization has a primary role in educating employees to the need of change to TQM and the
benefits of TQM. Bill Creech, in his book The Five Pillars of TQM, talks about the role of
organization in educating employees on the need to change to TQM: "You put the business in
their (employees) hearts and they will put their hearts in the business". The process of putting
the business in their heart is convincing them of the need for change to TQM. He emphasizes
the importance of teamwork and common purpose by stating that the results of the joint
efforts should be shared. A share in the success is vital for employee commitment as it
motivates them to perform better. Success and rewards of TQM can be shared by devising
suitable short-term and long-term plans that consider employees as one of the key
stakeholders of the company.
11. a. SALES FORCE AUTOMATION
Sales Force Automation (SFA) is an information system that enables companies to
acquire and retain customers. It increases the speed of managing or selling accounts, and
helps the salespersons to redesign their activities to enable them to provide better
services to customers. Staff members, agents and brokers sell bank's products and act as
salespersons for the banker. If there is a large network of agents, bankers can adopt SFA
to minimize the activities involved in selling banking products or services to the
customers. SFA serves the following purposes:
• Increased revenue: It increases revenues as it reduces the costs involved in
administrative as well as sales activities.
• Reduced cost of sales: The successful implementation of SFA largely depends on
the reduction in cost of sales. Field level staff spends more time in making
continuous and repetitive data entry. Sometimes, they make unsuccessful
attempts to extract and interpret data without having the required tools. The cost of
sales is reduced when the time spent on administrative and other non-sales-related
efforts is reduced.
• Increased mobility for the sales force: The field staff requires increased mobility
as they are usually out of the office to meet customers and prospects. Their
mobility can be increased by using Personal Digital Assistance (PDA), wireless
applications, and converging the web and phone, thereby reducing the frequency of
their visits to the headquarters to report their everyday activities. The more
customers the salespersons can meet, the more advantageous it is for the
organization. As mobility has become an important aspect for gaining a
competitive edge, organizations provide mobile tools such as hand-held sets with
Internet connectivity, to their field staff.
• Easily available customer with a single view: Bankers have various departments
such as the deposits department, the credit department and the accounts
department, and so on. The credit department may wish to see the status of the
account with regard to the end-usage of the funds lent by the bank, while the
accounts department may be interested in seeing the status of the bills that are
being negotiated. The staff may be interested in managing the customer accounts.
SFA enables each department to view the data individually and simultaneously
without any interruption.
b. ON-S1TE INSPECTION AND OFF-SITE MONITORING IN INDIA
RBI, as the Central Bank has the responsibility to supervise banks, under the Banking
Regulation Act, 1949. It has been inspecting banks with the objective of assessing their
financial and operational conditions and the quality of management. The major effort
has been towards ensuring the safety and soundness of the Indian Banking System. Onsite
inspection of banks and off-site monitoring are in fact, the two most important ways
of monitoring the banking system. On-site inspection is usually carried out on an annual
basis. Besides the head office and controlling offices, certain specified branches are
covered under inspection so that a minimum coverage of advances is ensured. The
primary objective of off-site surveillance is to monitor the financial health of banks
particularly during the period between two on-site inspections.
In many countries the Central Bank takes up the function of supervision of banking and
other financial institutions. In a few countries regulatory organizations have been set-up
to exclusively perform the supervisory functions. A few countries rely on off-site
surveillance, while some other countries rely on on-site inspection. How the perception
is different, is borne out of the fact that in USA, on-site inspection is an important tool
for bank supervision whereas in New Zealand, off-site monitoring is considered as the
most important. However, in most of the countries irrespective of the structure of
regulatory set-up, the major tools of bank supervision are both on-site examinations
coupled with off-site surveillance. In India, the supervisory process early on was
dominated by on-site examination and incidentally very little information was available
about the financial health of the banks, in between on-site examinations. Thus, the need
to introduce off-site returns in the supervisory process was felt, which in fact changed
the method of supervision itself. Supervision in India is now a combination of on-site
inspection and off-site surveillance with on-site inspection being the more preferred one.

Contact Details:
ICFAI University
Nagarjuna Hills,
Punjagutta,
Hyderabad,
Andhra Pradesh 500082 ‎
040 2343 0411
India

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